Facts and theories

motley

I see this all the time. An article (like the one above) starts out well, but quickly lapses into stupidity.

This idiocy is from the blog for the “Motley Fool,” a financial-services company that provides stock and financial advice to its clients. Headquartered in Alexandria Virginia, the company employs more than 300 motley fools. 

I liken these kinds of articles to being a flight instructor with a student pilot…

Expansionary fiscal policy is when a government starts spending more, or taxing less.

Or doing both at the same time. Expansionary fiscal policy is simply the opposite of austerity. So far so good. In the illustrations below, I am the flight instructor; the one speaking.

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In the U.S. today, expansionary fiscal policy is typically associated with an expanding deficit and national debt. A government can have a budget surplus and still use this policy. The key is that it just spends more or taxes less, regardless of its budgetary surplus or deficit.

Wrong!

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The “national debt” is simply the amount of money that investors (plus the U.S. government itself) have deposited in Federal Reserve savings accounts. In real life this has little to do with the size of the federal deficit. Furthermore if the U.S. government has a budget surplus, then the government is spending less, or taxing more, or both.

Governments pursue expansionary fiscal policies as a tool to stoke an economy into growth and to create jobs.

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The theory behind these decisions is based on the Keynesian Theory of economics, one of the more widely accepted and respected schools of thought today.

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An expansionary fiscal policy is a powerful tool, but a country can’t maintain it indefinitely. Eventually, its budget deficit will become too large, driving up its debt to an unsustainable level. Therefore, this policy is typically viewed as a short-term tool, not as a constant.

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The only time a budget deficit could ever be “too large” is when it creates the possibility of inflation, and we are light years away from inflation problems. In fact, the only time this has happened during the last hundred years in the USA was during the World Wars. Everyone had a job, but consumer goods were rationed for the war effort. There was near zero unemployment, while the U.S. government created mountains of money for the war. Thus, the U.S. economy was awash in money, but there were not enough consumer goods to spend it on. This caused the threat of price inflation, plus hoarding, black marketing, and so on.

To keep the war effort going, the U.S. government needed to pump massive amounts of money into the economy. And to avoid inflation, the government needed to suck massive amounts of money back out of the economy.

The government put money into the economy by awarding military contracts. And the government sucked money back out of the economy by frantically urging people to buy “war bonds,” which took money out of circulation until the bonds matured at some future date. The U.S. government (falsely) told Americans that “war bonds” were needed to “pay for the war effort.”

During World War Two, the U.S. government once again frantically urged people to buy “war bonds.” Also, the U.S. government enacted the individual withholding tax (i.e. payroll taxes). Again the U.S. government (falsely) told Americans that the “war bonds,” and the revenues from personal income taxes, were needed to “pay for the war effort.”

By the way, how can the “national debt” be driven up to an “unsustainable level” if the U.S. government creates all the dollars it likes out of thin air?

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Then the article recovers somewhat, until we come to this…

Macroeconomics is extremely complex.

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Macroeconomics is not extremely complex. But rich people and their puppets (i.e. pundits, professors, and politicians) want you to think it is, so you will submit to poverty and inequality.

It is next to impossible to prove these theories as stone-cold facts.

No! It is a “stone-cold fact” that a larger federal deficit means more aggregate demand. This is basic Keynesian theory.

The word theory (as opposes to a hypothesis) refers to a workable, practical, usable, verifiable nexus of facts.

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Then the article confuses monetary policy (which concerns interest rates and inflation) with fiscal policy (which concerns government spending and taxation).

Also the article calls quantitative easing “stimulative,” when all it stimulates is the financial economy (i.e. the markets and Wall Street), not the real economy.

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Then we get sheer stupidity… 

The point is, be careful in accepting economic theory as fact. Expansionary fiscal policy may be a particularly strong influence on these markets, but it remains theory — not fact.

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The point is, be careful in accepting economic theory as fact. Expansionary fiscal policy may be a particularly strong influence on these markets, but it remains theory — not fact.

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