Sterling Terrell

smart ideas from books (mostly)

  • Home
  • About
    • My CV
    • Books
    • Series
  • Newsletter
  • Advertising
  • Tools

Fiscal Policy: Does it Work?

Fiscal Policy: Does it Work?

Fiscal policy, the attempt to use government outlays and revenue to better the economy, simply does not work either a priori or in practice.

But just ask any undergraduate student in Macroeconomics 101 about fiscal policy. They know the “correct” answer: If the economy is “too slow,” the government should lower interest rates and increase government spending. If the economy is “overheated,” the government should raise interest rates and decrease government spending.

The horrors of monetary policy aside, fiscal policy cannot stimulate the economy. As we know, the government has no money of its own. It has only the power to tax and spend the money of others. There can only be a transfer that takes place, not a creation of wealth: jobs in X are gained, but jobs in Y are lost.

However, this transfer is actually a loss. Taxing away a person’s ability to fulfill his own wants and then providing him with things he may not care about makes him worse off. This process condescendingly supposes that individuals cannot decide for themselves what they need.

Furthermore, taxing is not done in a uniform manner. Progressive income taxes, double corporate taxes, and estate taxes all disproportionally take from the people that make, create, invest, and speculate to the betterment of all. Henry Hazlitt famously explained this in his well-known work Economics in One Lesson (see chapter five).

The common objection to such a theoretical analysis is: “Well. No. You have to look at the fiscal multiplier. One dollar in government spending, once it filters through the economy, will make GDP increase by more than one dollar.”

Let us agree to play the empirical game, momentarily.   New work done by Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh, covering data from 45 countries from 1960 to 2007, casts doubt on the validity of the multiplier in many cases.

Our findings lead to the usual “it depends” answer to the size of the fiscal multiplier question. As those familiar with macroeconomic theory likely anticipated, the size of the fiscal multipliers critically depends on key characteristics of the economy (closed versus open, predetermined versus flexible exchange rate regimes, high versus low debt) or on the type of aggregate being considered (government consumption versus government investment). Policymakers would therefore be well -served in taking into account a given country’s characteristics in evaluating the benefits of any fiscal stimulus package.

Read the details for yourself, but the differences they found seem to be the largest when comparing fixed- and flexible-exchange-rate economies,

 

and closed and open economies:

This all suggests that in a country such as the United States the fiscal multiplier is virtually zero.

Robert Barrow agrees.

So, in addition to fiscal policy taking away the freedom to choose, robbing X to hand it to Y, and penalizing the very people that improve our lives, it also fails empirically. Even if it did not, as is seemingly the case in certain closed economies graphed above, there would still not be a valid reason to oppress people further by taxing away their money for “stimulation.” By that rationale, a fiscal policy taking up 95% of GDP would make people better off than a fiscal policy taking up 5% of GDP. Clearly, this is not the case.

Earlier this year, Frank Shostak predicted that the recent fiscal stimulus would not help the US economy. Looking at unemployment, he was right.

Fiscal policy does not work, a priori or empirically, but the Austrians already knew that.

First published by LvMI.

Share this:

  • Click to share on Facebook (Opens in new window)
  • Click to share on Twitter (Opens in new window)
  • Click to share on Pinterest (Opens in new window)
  • Click to share on Tumblr (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to share on Reddit (Opens in new window)
  • Click to share on Pocket (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)

Filed Under: PotpourriTagged With: #Economics, #FiscalPolicy

Is There Such a Thing as Austrian Investing?

Is There Such a Thing as Austrian Investing?

[An audio version of this article, read by Dr. Floy Lilley, is available as a free MP3 download.]

What is Austrian investing? Is the way an Austrian invests different than any other? Can Austrian principles be formed into an investing method? As one who is profoundly interested in the financial markets, I believe these are questions worth asking.


Equity markets have collapsed in value, bond yields are off, real-estate markets are (in many places) in a state of disarray, monetary devaluation through government inflation is a constant dilemma, bailouts occur weekly, and wars and rumors of wars seem to lurk in the distance. Investing of any sort is enough to make one’s stomach turn in times such as these. The hole in the backyard and that spot between the mattresses keeps looking better and better.

Given all this, we can say one thing for sure: there is a lot of uncertainty in the world around us. And given enough time in investment and finance classes, you learn that in the end all an asset manager is really good for is managing that uncertainty — managing risk. The appropriate mix of assets in your portfolio will depend on your level or tolerance for risk. An endowment fund, a 35-year-old attorney, a pension plan, and a 65 year old retired professor do not share the same level of risk tolerance; consequently, they will have very different looking portfolios.

Conventional investing today falls into two categories. The first group says it is best to be as diversified as possible (passive investing). One should buy into an index fund (or some other broadly diversified fund) and hold on for the long term. Coupon payments, dividends, interest, and the passing of time will do the job for you. The second group thinks that the best strategy is to outsmart the market (value or growth investing): find out where the market is going to go by forecasting it, and constantly position your portfolio to profit from it.

Problematically, both of these methods address risk from the same perspective. Under each, there is a high probability that on a given day the portfolio will see a small return and a very small probability that the portfolio will show a large return — due to the unexpected.

Austrians know that the future is uncertain and the uncertain is just that — not known or knowable (i.e. unforecastable). Rather than just diversifying (and hoping for the best) or trying to predict the future (with a crystal ball, or a regression), why not use the fact that the future is uncertain as an investing strategy in and of itself? Develop an investing strategy that has, on any given day, a high probability of a small negative return, and a small probability of a very large positive return.

Rather typically, this idea is not original and Nassim Nicholas Taleb of Empirica Lab is already doing exactly this. More famously, Dr. Taleb is the author of Fooled by Randomness and, more recently, Black Swan — both New York Times bestsellers.

For an excellent bit of background information and a better description of his views, see the Mises Daily Article “Fools Put Faith in Data Alone” by James Sheehan. In addition, Dr. Gary North also has a well written (and scathing) critique, “How Mr. Taleb Got Utterly Fooled by Randomness,” available at LewRockwell.com. (The latter article is more theological in nature.)

More specifically, Dr. Taleb advocates putting the majority of a portfolio in less-risky-to-riskless assets, and a much smaller portion of the portfolio in extremely risky assets that have a limited downside.

Simply put, Dr. Taleb makes money by only buying options. On most days, the options expire worthless. On a few days, an unexpected shock is realized, the market moves wildly, and large amounts of money are made. This is identical to finding a volatile industry (or equity) and doing a “long straddle” with it: within a narrow trading range, maximum losses are known in advance and fixed, while a large price movement (positive or negative) can show a virtually unlimited profit.

To further explore Austrian investing, one might look at the nature of Austrian Business Cycle Theory: how can the role of the Federal Reserve in setting interest rates, causing shortages and surpluses in the market for loanable funds, the nature of malinvestment, and the inevitable boom and bust that follow, be formulated into a successful investment process?

But as for Dr. Taleb and the nature of risk, what can be more Austrian than an investment strategy that is based entirely in the notion that the future is uncertain and accurately forecasting it is impossible?

This article was first published by the Mises Institute.

Share this:

  • Click to share on Facebook (Opens in new window)
  • Click to share on Twitter (Opens in new window)
  • Click to share on Pinterest (Opens in new window)
  • Click to share on Tumblr (Opens in new window)
  • Click to share on LinkedIn (Opens in new window)
  • Click to share on Reddit (Opens in new window)
  • Click to share on Pocket (Opens in new window)
  • Click to share on WhatsApp (Opens in new window)

Filed Under: PotpourriTagged With: #Economics, #Investing

  • « Previous Page
  • 1
  • …
  • 1857
  • 1858
  • 1859
  • 1860
  • Next Page »

Subscribe to Blog via Email

Notifications of all new posts by email.

Connect

  • Facebook
  • LinkedIn
  • Pinterest
  • Twitter

Search

Top Posts

  • The Tricky Lily Pad Riddle (You Probably Can't Solve)
    The Tricky Lily Pad Riddle (You Probably Can't Solve)
  • Can You Solve The Bat And Ball Riddle?
    Can You Solve The Bat And Ball Riddle?
  • Another Great Riddle For You To Try
    Another Great Riddle For You To Try
  • Mercy, Elevation Worship & Maverick City
    Mercy, Elevation Worship & Maverick City
  • This Is How To Draw A Simple Robot
    This Is How To Draw A Simple Robot
  • Economics 101: Classical Economics
    Economics 101: Classical Economics
  • Tesla Model S
    Tesla Model S
  • God Gives Job Double Everything, Except This?
    God Gives Job Double Everything, Except This?
  • Keep People Guessing By?
    Keep People Guessing By?
  • Our Mercenary Heart
    Our Mercenary Heart

Supporting = Loving

Buy Me a Coffee

Recent Posts

  • Tesla Model S
  • Brandon Hays First Sermon @ The Church At Harpeth Heights
  • How To Make A Clay Pot
  • My Reading Advice
  • Sometimes It’s Fun Being A

Copyright © 2023 · Generate Pro On Genesis Framework · WordPress · Log in