Well, at least I blog more often than Haley’s Comet.  Then again, he only gets Wi-Fi access like what, every 76 years?  Somewhere, there’s a graveyard containing all the brilliant blog ideas I’ve had but never got to write.  And somewhere, kids avoid it, not because it’s haunted—which would be way too cool—but because it’s completely square and boring.

One idea at least I can save from that graveyard, an idea for which I can thank our President (of the United States, not the university).  Several weeks ago—I’m guessing two—I heard our President say on television, “We cannot cut our way to prosperity.”  Being an inveterate smart aleck, my first thought was: Yes We Can!

One of the things that annoy me about politics is the propensity for people to make statements about the world with the apparent belief that their conviction necessarily makes it so.  (In fairness, it irritates me everywhere.)  I mean, I can say a lot of things with conviction that aren’t necessarily so.  And the President’s statement rests on a common delusion among politicians: if the government doesn’t spend money, it doesn’t get spent.

Perhaps this represents a disconnection of macroeconomics from microeconomics, and is evidence of over-specialization in yet another field.  Microeconomics studies individual behavior; macroeconomics looks at the aggregated results of that behavior, the big picture, so to speak.  The President is thinking in purely macroeconomic terms, and as a macro event, the national economy requires an aggregated, macro actor to influence it.  So if the government doesn’t spend the money, it has no effect.

As microeconomics reminds us, though, the economy is actually made up of lots of individual decisions.  When government does not collect and spend money, it remains in the hands of those individual deciders.  (Yes, that’s right: in the economy, we are all the deciders.)  And if recent history is any guide, those individuals have absolutely no problem spending.

Let us assume for a moment the opposite, however.  Say individuals don’t spend their money.  So long as they do not bury it in a can in the backyard, it still serves to stimulate the economy, because they put it in a bank.  The bank doesn’t bury it in the backyard either, but lends it to people who want to do something productive with it (productive enough to pay the bank and you for the use of it, and still have it be worthwhile for them).

Both of these outcomes are superior to government collecting the money and spending it (in most cases), for at least two reasons.  First, the government has a great deal more friction, or deadweight-loss; some of the money is dissipated in the paperwork and administration necessary to collect and spend it.  Second, when the government has the pooled resources at its command, it has the ability to influence behavior—to make, rather than take, prices.  That is, it can drive the market.  Although the aggregated behavior of large groups of consumers, savers, lenders, and borrowers can do the same, they are not organized.  None of the individuals in the group can wield the clout of the entire group.

Obviously, there are some exceptions.  There are times when we want the government to do that.  The independent decisions of all those individuals will not usually produce enough defense, for example, because of free-riding problems.  So we want the government to use the coerced collective clout of tax dollars to cudgel that market a little (though again, since the number of players in that market becomes small—one consumer and few producers—other problems crop up).  Consumers can display herd behavior, rushing lemming-like off the cliffs of Britney Spears albums or collectible dinner plates.

For simply increasing productivity in a market, though, government spending is inferior to private action, because less bang comes from each buck.  Again, this is in a general sense, and the size of the federal budget, deficit, and debt do not encourage the idea that we are asking too little of government.  So, to return to the rebuttal of the President’s claim (with the President’s own slogan), we can cut our way to prosperity, whether as a country or as individuals.  If individuals dispose of their resources directly, cutting out the bureaucratic middle-man as it were, the same amount of resources will usually have more effect.

Even in a macroeconomic sense, though, reducing debt would be a way of cutting ourselves to prosperity.  That is, let us assume that the government does not decrease revenues, but simply decreases expenditures.  If we cut spending to meet revenues, we stop borrowing money (which is more expensive to use than current money).  If we pay off debt, it frees up money going to service interest for other purposes (or to be left in the hands of the laborers who earn it).  Either way, we get more for the same amount of resources.

So yes, Mr. President.  Yes we can.