Wednesday, June 29, 2011

Spending, the Cause and Solution of all Government's Problems

Unfortunately, unlike Homer Simpson's beer insight, this isn't considered ambiguously by one person, but rather, differently by opposite wings of our political spectrum. Obama is commenting on some budget wrangling, and addressed the simultaneous desire to cut the debt and increase spending:
Deficit reduction, debt reduction should be part of an overall package for job growth over the long term. It is not the only part of it, but it is an important part of it...If there are steps in the short term [that] may reduce the amount of cash in the treasury but in the long term mean we are growing at 3.5 percent instead of 2.5 percent, then those ideas are worth exploring,

He is arguing we should spend to reduce our debt because of effects on future growth rates. This is all from the magic of the multiplier, where investments that would be wasteful in the private sector have a positive NPV in the public sector. This makes sense to most modern macroeconomists and they provide the intellectual cover for those who don't understand it but want it to be true. Economists have changed Adam Smith's dictum 'what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom' to 'what is foolish for a family is wise for our government.'

I regret wasting time learning the formal casuistry that rationalizes the pedestrian and perennial desire to increase redistribution and federal power under the pretext of increasing growth. I know it's a defensible statement, not logically impossible just contingent on some heroic assumptions, but when you look at how our money is actually spent, empirically absurd: defense spending, K-12 education, ethanol, light rail, Medicare, all boondoggles that have made things worse via their top down direction. Meanwhile, Japan cleans up its disasters much more efficiently than the US would have (see Katrina), and where in 1931 the US could build the Empire State Building in 400 days, the World Trade Center is at 10 years and counting. At this rate we are declining much faster than when Egypt built the monumental pyramids at Giza around 2600 BC, then the pathetic Unas 300 years later (my grandkids will probably think the Hoover dam was made by alien astronauts).

Obama's basically has the same homunculus in his head he had in 1994 while criticizing the infamous Bell Curve on NPR, when in one of his few public comments made before becoming a professional narcissist, he made the familiar call to more spending:

Real opportunity would mean quality prenatal care for all women and well-funded and innovative public schools for all children. Real opportunity would mean a job at a living wage for everyone who was willing to work, jobs that can return some structure and dignity to people's lives and give inner-city children something more than a basketball rim to shoot for. In the short run, such ladders of opportunity are going to cost more, not less, than either welfare or affirmative action. But, in the long run, our investment should payoff handsomely. That we fail to make this investment is just plain stupid.

As Lao-Tsu said, 'at the center of your being you have the answer; you know what you want'. The rest, is formal education.


Anonymous said...

From my point of view you and Obama are in the same economic camp. You both take the traditional fiscal conservative view that money is a scarce resource, and the government is running low on this resource and must replenish its supply. Otherwise the government will go bankrupt, or alternatively hyperinflation will ensue.

Obama expressed his economic theory most clearly when he stated the government is "out of money". Yes, he really said that.

zarkov01 said...

If money is not a scarce resource then why do we bother to work for it? Why does the government bother to levy taxes?

I think you mean that that in a recession where the economy is operating below capacity, and interest rates are near zero, deficit spending will will bring the economy back to full capacity. Thus the deficits pay for themselves through increased economic activity. However in practice it seems that once the deficit spending stops, the economy falls back, tax revenue doesn't increase and the national debt goes up even over the long run. Something is rotten. Or least something in the bastardized version of Keynes our current government is using. The lame excuse we get for failure is we didn't spend enough trying to boost the economy. If only we had spent more it would have worked.

I think something's wrong with the basic neoclassical macro model of the economy. Like thermodynamics neoclassical economics replaces vectors with scalars like aggregate demand. One of Samuelson's professors was a disciple of Willard Gibbs, early pioneer of thermodynamics. That's why modern macro looks like thermodynamics. However the physicists have conservation laws which stem from symmetry-- see Noether's theorem. I don't think the economists have anything like that. Macro seems cobbled together with faith-based rules. In other words, macro economics is not a science. We realized all this in the late 1970s, but now we find the old Keynes re-animated like Dr. Hans Gruber in the 1985 cult-film Re-Animator. It didn't work out too well for Gruber because "the dose was too high." Similarly we might overspend and get a monster instead of a recovery.

Anonymous said...

The purpose of taxes is to maintain the value of the government's money (which would otherwise be worthless). Note that taxes do not "fund" government as many people wrongly believe.

What is scarce are real resources (e.g. labor). Money is just a number, and you can't run out of numbers.

Patrick R. Sullivan said...

Are we in Warren Mosler territory?

Anonymous said...

MMT baby.

Anonymous said...

"alien astronauts"?

You meant "immigrant astronauts" I'm sure.