Saturday, March 02, 2013

Thoughts four, a sequester

Part 1, Spending and collapse: The following claims currently drive the debate over government spending:

a. Excessive government debts cause economic collapse.
b. Government spending promotes economic growth, leading to increases in tax revenue.

These claims together form a vicious cycle: To fix excessive government debt (a) we can increase tax revenues by increasing governmental spending (b) which in turn may cause excessive debt (a) -- and this completes the cycle.

As any technocrat worth his techno will point out, some kinds of government spending are more likely to lead to economic growth than others. In particular, the "vicious" cycle is not very vicious if the governmental spending choices in (b) are wise enough so that the tax revenues are commensurate with the spending. Here is the point in the discussion in which each participant gets to interject a list of ways to reduce wasteful spending, and increase spending on good investments.

Part 2, Jobs and production: All government spending creates jobs. Social security payouts might not appear to create jobs, but even here, people are being paid simply to stay alive, which is at least a part-time job. So, shouldn't we increase government spending to create more jobs? The answer must often be no, considering Part 1.

To get to the bottom of this, we go to the bottom of the economy, in the basement, where all the good stuff is hiding: food, shelter, security, comfort, therapy, freedom, etc. The free market creates all of these things, at least in some form. Thus, a basic criterion for justifying X dollars on a particular government line item is that this spending must result in more of the good stuff compared to simply reducing taxes by X, allowing you to spend those dollars however you see fit.

Part 3, Theft and welfare: One reason for government spending is to provide for people that can't help themselves. This urge must be held in tension with the concerns raised in Part 1 and Part 2.

In addition, many governmental functions must be acknowledged as necessary evils. War is murder. policing is assault (at least, I felt that I was being assaulted last time I got a speeding ticket). Similarly, taxation is theft. The only differences between theft and taxation are (a) that more people think that taxation should be done, for many good reasons, and (b) the thief is so big that there is no point in trying to resist. This is a moral argument that any budget line item should meet not only the criterion provided in Part 2, but also something a bit stronger (I fail to be more specific).

Part 4, Stimulus culture: Smart people have rightly observed that the government can stimulate the economy through deficit spending. There are lots equations and complex mechanisms, all of which rest on important assumptions. Being a simple man, I prefer to understand the world in terms of how much I like Pepsi. If I'm worn out, drinking some sugar water with caffeine gives me energy. Having a drink once every few days might even make me a happier person, less prone to depression, over the course of my life. However, if I drink Pepsi every hour, I'll get fat and tired. Even worse would be using Pepsi to self-medicate in the early stages of a more serious illness, delaying my first visit to the doctor.

Similarly, an economic stimulus make sense only if it comes in modest doses, is not used too often, and is not used to delay addressing more serious problems. I suspect that stimulus spending in most of the world's leading economies is failing on all three points.

The modern culture of stimulus spending as rooted in Keynes began around WWII. The 70-year trajectory of its effects is interesting: rapid economic growth for 30 years, moderate growth for 20 years, 10 year of "malaise", and recently a slight shrinkage.


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