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Commentary and Opinion, Economics

The Paradox of Thrift Is Now The Paradox of Working

BIA Commentary and Opinion

By Ted Barnhart

In his recent book How an Economy Grows and Why It Crashes Peter Schiff describes John Maynard Keynes as “a very smart early twentieth century English academic who developed some very stupid ideas about what makes economies grow.  Essentially Keynes managed to pull off one of the neatest tricks imaginable:  he made something simple seem to be hopelessly  complex.”

Perhaps Keynes’s greatest scam of all is the so called “Paradox of Thrift” which postulates that saving your money can be a bad idea.

If you think that idea is crazy (it is), now  they tell us that the best way to create jobs is to pay people not to work.

Let me say that again.  Serious (supposedly) people are telling us that the best way to create jobs in this country is to pay people not to work.

Here is but a sampling of the latest fever to spread throughout the Keynesian camp and supporters:

Nancy Pelosi recently told us “Economists tell us that unemployment insurance — the non-partisan Urban Institute estimated that unemployment insurance returns $2 to the economy for every $1 spent.”

Rachel Maddow picked up the ball and proudly trumpeted “the single most effective thing that they studied that Washington can do to reduce unemployment—the very top?  Increasing aid to the unemployed,”   citing a Congressional Budget Office  (CBO) study.

Not to be out done, Keith Olbermann  in his “special comment” in regards to the tax deal compromise  proclaimed “The unemployed — unlike the rich whom this President has just bowed to are, in fact, the job creators.”

The list goes on, but you get the idea.  For the record, from a political standpoint I really don’t have much of a problem with an extension of unemployment benefits, there are much bigger issues for free market supporters to fight.

But when you try to tell me that the best way to create jobs is to pay people not to work, I will tell you that maybe it is time for us to sit down and have “that” talk about Santa.

To put it in Mr. Schiff’s terms: paying people not to work in the name of creating jobs is “a really stupid idea.”

Do these people really believe this line of reasoning?  If so, here are some questions I would love to have answered:

(Former) Speaker Pelosi: If we can really get $2 back for every $1 spent on unemployment benefits, shouldn’t we fire everyone and pay them not to work?

Keith Olbermann: The jobless population is full of extremely intelligent, hard working and capable people. If it is in fact the jobless that create the jobs, why are these intelligent, hardworking and capable people  not able to create a job for themselves?

Rachel Maddow: You tell us

 “that Of the 11 different policies they [CBO] evaluated, the single most effective one for creating jobs: unemployment benefits.  The single least effective one for creating jobs was, oh, reducing income taxes.  Yes.  So, again, to be clear, most effective, best thing for the economy: unemployment benefits.  Least effective in terms of what‘s good for the economy: reducing income taxes.

This is multiple choice and you get the answers.  Not from some schmuck on cable TV, but from the nonpartisan Congressional Budget Office, that office that studies this stuff.”

My questions for you are: Did you read the fine print in regards to the CBO analysis?  Do you understand how this conclusion was reached?  Does the idea that unemployment insurance is the best policy to create jobs, pass the smell test?

Or are you just “some schmuck on cable TV.”

Indeed the CBO report cited by Maddow and others tells us on page 14 that “the approach adopted to measure a policy’s effect on output is similar to the method CBO previously used to asses the effect of the American Recovery and Reinvestment Act (ARRA, Public Law 11-5).”

You probably remember that one.  It was the report where they stopped telling us how many jobs were  created and  started telling us how many  jobs were “saved.”

It doesn’t take much to find criticism of that report and methodology, but among my favorites is a piece written by Louis Woodhill at Real Clear Markets  titled CBO Promotes a Stimulus Fantasy.

“The striking thing about the CBO analysis is that it is “reality proof.”  Rather than presenting evidence that “stimulus” works, the CBO employed economic models that assume that “stimulus” works.  As a result… the CBO’s calculations would always show that “stimulus” worked exactly as intended.

To estimate the impact of stimulus upon 2Q2010 GDP and employment, the CBO applied “output multipliers” to the reported expenditures in eight different categories.  Their calculations did not include any actual economic data.. (emphasis mine).”

In essence the support for the idea that the jobless create the jobs comes from the same place that told us how many jobs were saved instead of created, it’s all a bunch of bullspin.

Even the great George Orwell, (who in political terms was a democratic socialist) would blush at how the Paradox of Thrift has become the Paradox of Working.  

I guess we can add the “Jobless Create Jobs” meme to the Orwell Ministry of Truth slogans:  “War is Peace,” “Freedom is Slavery,” and  “Ignorance is Strength.”

Somehow that last one seems apropos.

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DISCLAIMER: Nothing in this article should  be construed as a personal recommendation or investment advice.  Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security.   Investors should conduct their own due diligence and seek the advice of a financial and/or investment  professional before making any investment decisions.


2 thoughts on “The Paradox of Thrift Is Now The Paradox of Working

  1. This insane idea of the jobless creating jobs because they are receiving some type of payout from the government might of been the silliest thing I ever heard in the classroom. I finished my MA in Economics in 98 before I had a stroke during surgery and now am on disability because of short term memory loss. One of the things I remember most was consistently arguing with my Professors since I had worked at the Firestone plant as a laborer and then was in sales and had see the real world. I took a class on the passing of NAFTA in 97 while working on my Masters and consistently presented questions to my Instructor about what was going to happen to those already in industry and used to good pay and great benefits. His answering me by telling me they would all move to to other jobs was the most insane thing I had ever heard. They were taking mostly men and a few women with no few demanding skills who were used to making a good living, which I believe was once and still partially is very important to men. Just the pure numbers of unemployed will do nothing but either drive wages down or keep them stagnant. Not only were their way of living taken away from them, but their dignity was as well. Men, once, felt their job, amount of income, and ability to take care of their family was a large part of their manhood. By taking this from them, has led to more and more social problems then we are able to correct within a generation. And sadly, the spiral has just started moving in the wrong way. I cannot begin to grasp what lay ahead for the U.S. One thing is for sure, being able to speak Chinese is going to become extremely important in the future.

    Posted by Dan Robbins | January 23, 2011, 7:45 AM
  2. Reblogged this on Climate Ponderings.

    Posted by kim2ooo | June 14, 2012, 2:00 PM

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