Saturday, July 25, 2009

Stimulus Riddle, Can You Solve It?

In a comment after my post, Obama: Please Try This At Home, Taylor O. offers the following parable, which evidently is going around the internet. I provide my answer below, so if you want to think about it yourself, stop at the "spoiler alert" line before going on.

Taylor O. says:

I'm playing devil's advocate here so don't shoot the messenger; the stimulus e-mail going around goes as follows

"A Stimulus Story"

It is the month of June, on the shores of the Black Sea, it is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.

The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

The Butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her services on credit.

The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, andtakes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.

And that, ladies and gentlemen, is how the United States Government is doing business today.



SPOILER ALERT, SPOILER ALERT




None of these people were in debt. They all provided a value to one another. They could have used the IOU as money which they effectively did. In turn, each one provided a service or a good in exchange for the other's service and all debts were actually settled. To see this, consider the following:

The supplier worked to produce fuel and supplies. He traded these supplies to the pig grower who gave him an IOU.

But, the supplier used that IOU to pay the hooker. Now the pig grower "owes" the hooker.

The hooker used the IOU to pay the hotel. The pig grower now owes the hotel.

The hotel used the IOU to pay the butcher. The pig grower now owes the butcher.

The pig grower gives the butcher a ham, and all debts are settled.

The hotel proprietor didn't need to steal the 100 euros from the tourist and then give it back. Effectively, nothing happened with respect to the tourist.

With stimulus, the government seizes money from someone and gives it to someone else. Similarly, this is at best a zero sum game, albeit profoundly immoral. In practice, it is less than a zero sum game since the government will spend the money on things no one wants and will impair capital formation to the extent that the money would have been invested in something productive rather than consumed.

This parable has nothing to do with actual stimulus since each person freely and voluntarily exchanged a good or service. The evil was stealing the tourists money without his consent although he ultimately was paid back.

To actually equate the parable to stimulus, an additional plot should have been created where the town police seize the tourists 100 euros and spend it on a turtle tunnel (true story) or a box of dirt, and then never return the money to the tourist. The police (or Paul Krugman) then goes on Keith Olbermann and declares that he will be better off in the long run since the theft will "improve" the economy.

6 comments:

Fred Lewis said...

And in the final plot, the tourists would continue on their trip, pass over the "turtle tunnel" area without incident and live happily ever after. Without the "turtle tunnel", they would have likely plowed into a 10 foot alligator and died on their vacation. The "turtle tunnel" is but 7% of a larger project more formerly known as the Lake Jackson Ecopassage. This project is about human safety with an added bonus that it conserves wildlife. Thousands upon thousands of animals crawl on to the 4-lane divided highway day and night. The ecopassage is being built to keep the wildlife, animals like 40 pound turtles and 10 foot alligators, off the highway to ensure motorist safety. It's not some PETA "save the turtle" protest. This is a bona fide transportation enhancement project with real value. And, yes, it will create the equivalent of 200 jobs for the year it will take to construct.

Tom said...

Fred, if it's so great, why didn't you do it? OK, you don't have the money. Well surely there must be more people who think the same way as you, why not pool your resources to dig a tunnel for the turtles?

Oh I know, because it's easier to use government force to just make everyone else do it for you. That way you can sit back in moral supremacy gloating to your friends while you actually didn't do a damned thing.

Harold said...

I'm not sure if Fred is being serious.

Either way, with privatized roads this is a non-issue.

Fred Lewis said...

If they made each car pay a toll, each driver would have to pay 34 cents per day and the entire project would be paid off in a year. I'd gladly do my part and pay 34 cents per day for one year if I was traveling on that stretch. But, alas, I live in California. Yes, indeed, there are more like-minded people. In fact, 13.4 million people have signed letters of support for the Lake Jackson Ecopassage.

Anthony said...

Before: Everyone's net worth was $0, they had $100 in assets and $100 in liabilities.

After: Everyone's net worth is $0, they have $0 in assets and $0 in liabilities.

So what?

Doug Reich said...

Anthony,

Exactly.

The "so what" portion is that this parable was apparently being used to show the effect or possibilities of "stimulus". The parable fails because the premise, that they are all in debt, is flawed, as their assets equal their liabilties.

As I explained in my post:

http://dougreich.blogspot.com/2009/07/obama-please-try-this-at-home.html

stimulus is logically bound to fail. It is at best a zero sum game, and in actuality profoundly devastating and immoral.

***************

Fred,

I think you are missing the point, which I stated above.

Regarding your point re the "turtle tunnel", under capitalism, roads (and all other land) would be private and it would be up to the owner of the road (and essentially therefore, its customers) to determine whether they want to build such a thing.

It certainly is not the function of the government to own roads, and even to the extent that it does, it is certainly not up to the federal government to tax people from outside Florida to pay for such a thing. As you said, the best case under the current system would be for users of the road to pay a toll for the upkeep and maintenance.

Your statement regarding the poll showing support implies a serious fallacy. Such a statement implies that property rights are subject to vote. In other words, your statement implies that if enough people vote for a project, it somehow validates the government's expropriation of their income through taxes to pay for it.

Property rights are inalienable, i.e., they are derived from our nature, not from majority vote. One should not be able to vote away someone's property in the same way a vote can not be used to silence someone's speech, or to force them to worship a god. Without the right to keep the products of one's labor, one is a slave by definition.