Burying bottles of cash in coal mines – economic genius or financial delinquency?

A recent Paul Krugman blog invoked Keynes theory of the Marginal Propensity to Consume, and the metaphor of government burying wads of cash in bottles deep in America’s coal mines, in order to stimulate economic activity, when gently criticising Obama for coming in under-budget thus far in his stimulus plan’s projects. This provoked a strongly worded attack by Mish ShedlockFrom Mish’s blog –


In reality, the mine digging proposal is nothing more than another variation on the idea of paying people to do nothing (i.e paying people to dig holes and paying more people to fill the holes back in). Yes, if someone was stupid enough to propose that, and apparently Krugman is, we can indeed have 100% employment (until the economy totally blows up of course). The only real difference that I can tell is the mine digging idea only rewards those who find the money while ditch digging rewards everyone.

I use rewards loosely. With either idea, one must ask “What is the cost?” Krugman and the rest of the Keynesian clowns never address that part of the equation. Where does the money come from to pay for such ridiculousness?

Given that the US is already up to it’s neck in debt, after G.W. Bush’s flirtation with Keynesian stimuli, the money must be borrowed – possibly even printed. In all fairness to Paul Krugman, he is not actually advocating burying bottles of cash in order to employ people to simply dig them back up. Rather he is arguing that Obama should spend the money saved, on other projects that the state deems useful. The problem with that, of course, is that the upper limit on the stimulus appears to be completely arbitrary. It’s not linked to an expected return on investment. As the expected return diminishes, and projects become more madcap, the effect may be to ever more closely mimic the behaviour of Keynes’ cash burying government. Too much of the wrong type of stimulus will undoubtedly to lead to malinvestments, loss of competitiveness and other large scale problems in the future (potentially bubbles a la post-dot.com property bubble, commodities bubble, currency debasement etc).

So far Ireland has resisted taking the Keynesian route which as we can see is not without it’s detractors. Despite this there was good news on the job front with todays announcement by semi-state ESB of a plan to create almost 4,000 new jobs preparing Ireland for electric cars.

Hat tip thepropertypin

  • UHU

    Far too many links involved in this, it makes a simple subject too confusing.

    “Burying bottles of cash in coal mines – economic genius or financial delinquency?”

    How about you stop waffling and consider, personal profit?

  • kensei

    Ok, despite you imply baiting me, I”ll bite.

    Krugman and the rest of the Keynesian clowns

    Yes, this is a totally non ideological post, then.

    The problem with that, of course, is that the upper limit on the stimulus appears to be completely arbitrary

    I suggest you read Mr Krugman’s blog a bit more since how he determined what the stimulus should be and why he thought it too small was totally non-arbitrary.

    It’s not linked to an expected return on investment.

    Keynes:

    because they are not wholly wasteful, tend to be judged on strict “business” principles.

    The point is to pump prime and to prevent the economy becoming stuck in a vicious circle. The cost is not ignored. Debt is increased, which must be paid back, or the economy grown relative so it doesn’t matter as much. Over the long run, Mack. Ideally you wnat counter cyclical policy policy in a boom too. No one is suggesting otherwise; it is completely dishonest to try and make out taht it is so.

    Too much of the wrong type of stimulus will undoubtedly to lead to malinvestments, loss of competitiveness and other large scale problems in the future (potentially bubbles a la post-dot.com property bubble, commodities bubble, currency debasement etc).

    Pouring too much water on your house while it is on fire may result in water damage to unaffected areas. It’s not high on people’s list of priorities at the time, though.

    It’s roughly impossible to pin the housing bubble on any form of Keynesian stimulus, by the by.

  • Mack

    Kensei –
    I didn’t write that bit (it’s in italics), and I wasn’t baiting you, and I don’t 100% agree with either approach.

    Thought it might get a debate going though..

  • Mack

    Kensei –

    My interpretation of Krugman’s blog was that he regarded the metaphor as an extreme and unrealistic example of Keynes theory. It’s not what he was suggesting, and it’s an easy target for Mish to hit. My point was Obama’s team identified projects that were useful and when the budgeted them, it cost less. The next set of projects are presumably going to be less useful and so on. As you continue down that path you progress towards Keynes’ coal mine, the stimulus package announced was presumably either an arbritrary number (as the US has no surplus savings) or the original estimated cost of the projects. I don’t know the answer, but that’s where the debate is.

    It’s roughly impossible to pin the housing bubble on any form of Keynesian stimulus, by the by.

    Didn’t try. The US deficit is the result of Keynesian-like policies from Bush. The property bubble grew out of loose monetary policy related to said fall out. Currently we have loose monetary policy and Keynesian stimuli. We don’t want to repeat the mistakes of the last 7-8 years..

  • kensei

    Mack

    You are king wrongson. Krugman indeed picked an extreme example, but to illustrate the point that judging these things on a purely commercial basis is wrong. I suspect if you gave him the choice between doing nothing and the coal mine scenario, he’d be filling the bottles himself.

    Second, the proposed stimulus size Krugman suggested (much larger than the actual figure) was based on what he calculated as the output gap in the economy. I am sure you could argue his figures or his rationale, but ti wasn’t arbitrary. The only arbitrary factor is the amount of political support possible.

    Your proposition is also non sequitir. Later projects may be more difficult, harder to plan, less urgent but not necessarily any less worthy. It’s an implicit bias to suggest otherwise.

    Didn’t try. The US deficit is the result of Keynesian-like policies from Bush.

    I didn’t notice Bush reigning things in when things boomed, as Keynesian policy suggests. Also, the relationship to Keynesian polcies is coincidental. Cutting taxes is the extreme right’s raison d’etre.

    The property bubble grew out of loose monetary policy related to said fall out. Currently we have loose monetary policy and Keynesian stimuli. We don’t want to repeat the mistakes of the last 7-8 years..

    Really, if you are going to repeat such nonsense I shall have to not talk to you. Context is everything. This is like saying that because you got slashed in the gut with a knife, you don’t want the surgeon with a scalpel near you.

    Big economies are not like household finances. They can’t be run on homespun logic and intuition. If you are going to argue current policy is bad, argue on fundamentals.

  • Mack

    Kensei –

    Do you agree that there are swathes of economists (whole schools of thought in fact) who disagree with the notion that it is sensible to print or borrow money and pay people to do make work?

    You are entitled to argue that it does make sense (coal mine scenario), but I don’t think that it is accepted as scientific fact that this view is 100% correct. There is evidence from Japan for example that government stimulus projects, building motorways to remote villages and the like, did little in the medium term but massively increase the national debt, leaving Japan even more vulnerable today.

    Personally I’m in favour of counter-cyclical fiscal policy and stimulus packages to create jobs – but only if they are going to add something to the economy long term. Btw, Keynes wrote that back before the welfare state existed – we do provide the unemployed with money to spend today (without getting them to do non-beneficial work for it, leaving them free to find beneficial tasks to complete in their day).

    You’re right about Bush, he didn’t reign things in when they boomed, he allowed companies to take huge risks with other peoples money, and then bailed them out at his taxpayers expense when they failed. Terrible politician – we’re in agreement that it’s important Obama doesn’t repeat the mistakes of the past then so?

    It’s good that Krugman didn’t just pick a figure out of midair, but he was discussing Obama’s and didn’t mention his own in that blog entry – but thanks for adding some details here. The point of debate would be, that there would be others who would argue the amount spent should be more or less – using different criteria entirely. (The size of output gap itself could even be the subject of some debate – as it’s based on an estimation for potential growth in the economy, and even whether it’s sensible to attempt to plug it if the cost is too high – e.g. by increasing welfare payments.)

  • Mack

    Kensei –

    This article on the Freakonomics blog at the NY Times is a little more considered than Mish Shepherds rant..

    http://freakonomics.blogs.nytimes.com/2008/11/21/price-fishback-what-do-the-new-deal-and-world-war-ii-tell-us-about-the-prospects-for-a-stimulus-package/


    How successful were they at stimulating the economy? As yet, the only estimates we have are for the combined effects of the public works and relief programs. Studies that examine their success at the county level suggest that an additional grant dollar per person distributed to a county for public works and relief during the period of 1933 to 1939 contributed to a rise in in-migration and an increase in income per person in the county of about 80 cents in 1939. We should remember, however, that this was during a period when there were huge numbers of unemployed workers available for work. Even during this period, some studies find evidence of crowding out of private employment. Today, with unemployment rates below 7 percent, it is likely that such public-works spending would crowd out a significant amount of private construction.

    My own recommendation would be to evaluate the modern public-works programs more on the basis of the specific productivity of the programs rather than as stimuli to the economy. We know that we have an aging infrastructure of roads, bridges, and dams. The costs and benefits of the replacements would be my focus in evaluating whether to spend the money or not.

  • kensei

    Mack

    Do you agree that there are swathes of economists (whole schools of thought in fact) who disagree with the notion that it is sensible to print or borrow money and pay people to do make work?

    That is a rather loose definition. And I be interesting in the argument why and in what context. As for “make work”, if the government builds a bridge it isn’t “make work”. It’s building a bridge. It’s real work, and you can look some of the things that the New Deal built in the US and they are real and tangible and offer lasting benefits.

    You are entitled to argue that it does make sense (coal mine scenario), but I don’t think that it is accepted as scientific fact that this view is 100% correct.

    I never said it was. I simply said you mischaracterised the argument, which you did.

    There is evidence from Japan for example that government stimulus projects, building motorways to remote villages and the like, did little in the medium term but massively increase the national debt, leaving Japan even more vulnerable today.

    Actually, there is a lot of evidence that it did work, then the government pulled back. Google “Fiscal stimulus works when it is tried”. It is a matter of bad tempered argument over otherwise reasonable people.

    Personally I’m in favour of counter-cyclical fiscal policy and stimulus packages to create jobs – but only if they are going to add something to the economy long term. Btw, Keynes wrote that back before the welfare state existed – we do provide the unemployed with money to spend today (without getting them to do non-beneficial work for it, leaving them free to find beneficial tasks to complete in their day).

    Ideally you want to add something if you are spending all that money. But it is not 100% essential. Breaking a vicious circle is.

    You’re right about Bush, he didn’t reign things in when they boomed, he allowed companies to take huge risks with other peoples money, and then bailed them out at his taxpayers expense when they failed. Terrible politician – we’re in agreement that it’s important Obama doesn’t repeat the mistakes of the past then so?

    Yes. If Obama is eventually confronted by similar circumstances. Right now, he has to not make any new mistakes because he’s too busy fighting the last war. Pursuing policy that would contain inflation when you ahve deflation is about as big a disater as you can get.

    It’s good that Krugman didn’t just pick a figure out of midair, but he was discussing Obama’s and didn’t mention his own in that blog entry – but thanks for adding some details here. The point of debate would be, that there would be others who would argue the amount spent should be more or less – using different criteria entirely. (The size of output gap itself could even be the subject of some debate – as it’s based on an estimation for potential growth in the economy, and even whether it’s sensible to attempt to plug it if the cost is too high – e.g. by increasing welfare payments.)

    Yes. You could alos argue spending versus welfare versus tax uts. But you were claiming it was “arbitrary”. It isn’t. No matter who you think has the best argument, they have some economic rationale for it.