Riffing on “Responsible Government”

While I wait for my code to compile, I have a few minutes to jot down some ideas on how we got ourselves into this current economic mess (debt, taxes, deficits, etc), and what we might do differently in the future.

Part 1: Responsible Government

A lot of people throw accusations around, that their side is the ‘responsible adult’ side in the debate, and that the other side are ‘spoiled children’ at best, and ‘economic terrorists’ at worst.

But this begs the question: How do “responsible adults” manage their finances? Well, I consider myself to be a responsible adult, (high credit score, live within my means, etc), and there are a lot of other people like me out there, so why not start with my perspective?

As a responsible adult, first and foremost, it’s important, generally speaking, to live within my means. That doesn’t mean I don’t take on any debt, but I take on debt with a careful understanding of the risks involved – how much do I have to pay each month? How useful is the service or thing that the debt will allow me to purchase? Is debt the right way to accumulate the money to buy this, or should I save up over time.

Now, governments, of course, don’t really need to worry about saving, and in principle they don’t need to worry about running out of money, because (in theory) they can always print more. But in general, a responsible government looks like a responsible adult, only with a _lot_ of children. When times are tough, it makes sense to borrow money to help tide things over until times are good again. When times are good, it make sense to invest surpluses so that money is put to good use to help increase future revenue.

Here’s what a “responsible government” shouldn’t do:

1. It is absolutely true that responsible governments should not be buying votes by cutting taxes during a time when it has to borrow to pay its current accounts. That’s like an adult who is only working 20 hours a week and borrowing money from his home equity to help pay the bills. demanding that his boss cut his wages. Stupid, Stupid, Stupid.
2. But it is also absolutely true that a responsible government shouldn’t buy votes with entitlement programs when it has to borrow to pay its current accounts. That’s like an adult who is borrowing money from his home equity to pay the bills creating a ‘ouchie boo boo’ program to pay his kids extra money each time they get a scratch. Yeah, that’s not going to spiral out of control….

Part 2: Stimulus

I’m sympathetic to the argument that stimulus increases GDP. But only somewhat. On one hand, it’s clearly axiomatic that if GDP is defined partially as ‘how much is spent in aggregate’, then government spending will increase that number, all other things being equal. But on the other hand, government spending is distortionary to any sort of free- or mostly-free market economy. That is to say – there is a “natural” demand for a product X and a “government induced” demand for product X, and those two things are absolutely not the same.

For one thing, the “natural” demand for a product is the individual decisions of thousands or millions of potential buyers, who by the law of large numbers, are less likely to be influenced by shifts in the political landscape, more likely to look very closely at cost-vs-benefit analysis, etc. “Government-induced” demand is much less stable – it is absolutely influenced by political winds, and often far less cautious about cost-vs-benefit analysis.

In addition, “government induced” demand is far more corruptible – a few people make the key decisions (instead of the decisions of thousands/millions) and those few people are much more easily influenced, bribed, blackmailed, etc. So the idea that “stimulus” is the same thing as “private purchasing” is absurd. It is a very sharp, very dangerous tool, and it should be used wisely, cautiously and with utmost care.

Part 3: Aggregate Demand

As I’ve alluded in other posts, I find the idea of Aggregate Demand to be quite perplexing. Let me first say: I don’t have a problem with the idea that, during a recession, the government should borrow money from people who don’t need the cash right away in order to provide benefits to citizens to help keep them from starving/rioting/etc. Again, a responsible adult would borrow money if he had to to keep his children fed while he was out of work.

But I do have a significant problem with lumping government spending in with private spending (as I mentioned above), as if they’re the same (which is what happens when you lump everything together and call it ‘aggregate demand’.

And even more-so, I have a significant problem with the idea that all spending is created equal. Technology is constantly changing the world. Borders (the book company) went out of business because Amazon and the Internet provided people with alternative ways to get the information they wanted. If the government decides to spend money opening a brick-and-mortar book store, they are absolutely wasting money. I’m trying to use the word ‘wasting’ here carefully, in this case it means: ‘Not creating the maximum possible future tax revenue per dollar of stimulus’. Building a brick and mortar bookstore will employee some carpenters. It will employ some retail employee jobs. But it will not create a self-sustaining tax base. It is the stimulus-world equivalent of Fritos – empty calories with minimal nutritional value.

Let me give you two examples of “good” government projects: Hoover Dam, and Georgia’s state road 400 (known locally as GA 400).

Hoover Dam was a project beyond any company’s ability to pursue. In addition, the primary benefit of Hoover Dam was flood control, with millions of beneficiaries, who would each receive a small amount of benefit. Especially for its time, it was not the type of project that a private company could put together (and arguably not even today). But between the electricity and the flood control, Hoover Dam was a tremendous benefit to our country in aggregate. It created jobs, it reduced destructive (and thus wasteful) flooding, it is self-funding, and it saved lives.

GA 400 was created as a toll road, that would make it easier to get from the suburbs of Atlanta to the downtown areas. The state borrowed money to build the road, but then set up a toll. Within a couple of years, the toll paid for the road. And they left the toll in place (which they said they wouldn’t do) and now the road provides revenue for the state.

Giving money to unemployed people is also quite reasonable as a simple act of mercy, although I personally would prefer that it would be structured to start out generous, and then decay over time.

The point of these examples is to say – there are good ways to borrow and spend, and there are bad ways. Too many Keynesian economists seem to be indifferent to the way that the money is spent, because they have this peculiar belief in “Aggregate Demand”. In my opinion, if you can’t pinpoint specific and well-defined ROI for your stimulus, it shouldn’t be done. Otherwise, it’s just like gorging on 7 different flavors of Doritos and calling it a “seven course banquet”.

Part 4: Too Much Debt

The US’s “price of borrowing” is ridiculously low. Many Democrat wonks see this as “permission to borrow” – people want to provide us money, we should take it and spend it. And they are very confused when others would rather control the deficit, reduce the debt. They feel that it’s the wrong time for that sort of behavior. A recession is not the time for austerity.

If we had no debt, or minimal debt, I would be inclined to agree. Debt is a very potent tool and, used correctly, can make a lot of nearly impossible things relatively easy.

But the fact is, we are past 100% of our GDP in debt. That is the reason people are freaking out about the debt, and wanting us to cut back in a major way. Because debt sneaks up on you. At some point, people start saying “they’ll have to default”, and rates skyrocket. It’s what happened to Greece, what’s happening to Ireland, and what could happen to Spain and Italy. It happens out of the blue, when no one expects it – some magic threshold gets crossed, and suddenly people are antsy. And when they’re antsy, the cost of borrowing goes up. And when the cost goes up, it becomes harder to pay back, which means we have to borrow more, etc, etc, etc. A vicious cycle, with only one escape: Inflation.

There was a time when we could borrow lots of money, and not worry about nervousness in the markets. But this is not that time. We are in a delicate, anxious world right now, and the last thing we need to do is add more gasoline to the fire. We’re already in a weird place because of the debt ceiling, piling a lot of new borrowing on top of that is not helpful at all.

Thank you all for your time.

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