Saturday, January 9, 2010

It's Not That Complicated

Back in February, 2009 -- almost a year ago, now -- Bloomberg did an article on James Tobin's influence on Obama's $787B stimulus. The story included John Cochrane's thoughts on the subject.

Cochrane's view (as the article has it) is, "the idea that spending can spur the economy was discredited decades ago." John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago.

“It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.”

To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said.

From: "Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed," by Oliver Staley and Michael McKee. Feb 27, 2009. Bloomberg.

I'm no economist, as I've said before, but one thing is obvious to me: Spending is the economy.

Work and getting paid, and shopping and paying: this is what the economy is. Add to that producing stuff, and developing stuff if you want (but I count that in with work). Add leisure time and vacations and such if you want (but I count that with shopping). Add owning stuff if you want (but that's just how we keep score). That's what the economy is. That's all it is. There's no magic to it.

And how would you measure the economy? The only way is to measure the spending.

And how would you describe the economy? You could list all the various kinds of work people do, and all the various things they produce and the various ways they spend their money, and I suppose you could expand upon that. I use one word: transaction. The economy is transaction. The economy is spending.

Spending is the economy. A dollar of spending is a dollar of "spur." That's the whole idea behind "economic stimulus." It's not that complicated.

No comments: