Monday, June 17, 2013

Why Stimulus Fails

Entropy is the tendency for ordered systems to become disordered over time.  The second law of thermodynamics says that entropy affects all closed systems over time.  Clocks wind down.  Batteries go dead.  Fires eventually burn themselves out.  The amount of useful work that can be performed is always less than the stored energy available at the starting state.

What is true in physics is also true in economics.  In economic terms, wealth functions as a kind of stored energy.  As wealth is deployed, some of it is continually lost to entropic effects.  This sounds more complicated than it really is. 

Consider your weekly grocery shopping.  When you buy food, you are converting wealth from one form (money), into a different form (groceries).  At the end of the week, however, you have less wealth, since you no longer have either the money or the groceries.  Where did that wealth go?  You ate it, of course, and the food was burned off in your metabolism.

I think entropy has a lot to do with why unemployment is still so high, and the economy so fragile, even though we have had massive government stimulus through transfer payments during this recession.  Government programs like food stamps, extended unemployment benefits, Medicaid expansion and the like have all gone straight into consumption.  No new wealth is being created by any of these programs.

Once the stimulus is removed, economic activity drops off again.  In order to have lasting effects at growing the economy, the government should be focusing on creating wealth, instead of merely propping up consumption.

Not a lot of votes in that, though.

1 comment:

Mark Only said...

Probably your best post to date. Well said.