Saturday, January 24, 2009

(Potentially relevant link)

Greg Mankiw's latest blog post asks (for classroom discussion) the macroeconomic stimulus difference between a bank using bailout money to pay Joe the Plumber to renovate their own bathrooms vs. lending the money to Bob the Baker to hire Joe the Plumber to do the same in his own home.

This is posed in response to Obama's complaint that the banks are using bailout money in the former, 'wasteful' way.

I don't know macroeconomics, but I'm pretty sure the point of the bailout wasn't straight-up stimulus--we use tax breaks and government infrastructure improvements for that. The point was to save the banks from going under.

In doing so it was hoped the banks would be able to loan people money in the short term, but there's more to it than that. In fact, no one really talked about that detail until much later (when it didn't happen).

If the bailouts were our screwed-up way of stimulating the economy, Mankiw's question would be relevant, as hiring people to renovating their bathrooms stimulates the economy. What it doesn't do is help keep the banks afloat. And if the money isn't being used to save the banks, maybe we should be giving the money to someone other than the banks.

To go back closer to Mankiw's question, I can tell you the difference on a less-macroeconomic level: safe loans--and nowadays they're pretty cautious about risk--to Bob the Baker results in future cash flow for the banks. Renovating the bathrooms is probably not going to bring in new money or or reduce future costs. The difference is that the former helps prevent bank failure or need for future bank bailouts, which I'm sure has some notable macroeconomic impact. I don't know how the two options differ stimulus-wise, but the loans seems like the loans would be better for increasing GDP just because more money gets handed back and forth. I just don't really see that as particularly desirable.

No comments: