Well, at least I blog more often than Haley\u2019s Comet.\u00a0 Then again, he only gets Wi-Fi access like what, every 76 years?\u00a0 Somewhere, there\u2019s a graveyard containing all the brilliant blog ideas I\u2019ve had but never got to write.\u00a0 And somewhere, kids avoid it, not because it\u2019s haunted\u2014which would be way too cool\u2014but because it\u2019s completely square and boring.<\/p>\n
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).\u00a0 Several weeks ago\u2014I\u2019m guessing two\u2014I heard our President say on television, \u201cWe cannot cut our way to prosperity.\u201d\u00a0 Being an inveterate smart aleck, my first thought was: Yes We Can!<\/p>\n
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.\u00a0 (In fairness, it irritates me everywhere.)\u00a0 I mean, I can say a lot of things with conviction that aren\u2019t necessarily so.\u00a0 And the President\u2019s statement rests on a common delusion among politicians: if the government doesn\u2019t spend money, it doesn\u2019t get spent.<\/p>\n
Perhaps this represents a disconnection of macroeconomics from microeconomics, and is evidence of over-specialization in yet another field.\u00a0 Microeconomics studies individual behavior; macroeconomics looks at the aggregated results of that behavior, the big picture, so to speak.\u00a0 The President is thinking in purely macroeconomic terms, and as a macro event, the national economy requires an aggregated, macro actor to influence it.\u00a0 So if the government doesn\u2019t spend the money, it has no effect.<\/p>\n
As microeconomics reminds us, though, the economy is actually made up of lots of individual decisions.\u00a0 When government does not collect and spend money, it remains in the hands of those individual deciders.\u00a0 (Yes, that\u2019s right: in the economy, we are all the deciders.)\u00a0 And if recent history is any guide, those individuals have absolutely no problem spending.<\/p>\n
Let us assume for a moment the opposite, however.\u00a0 Say individuals don\u2019t spend their money.\u00a0 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.\u00a0 The bank doesn\u2019t 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).<\/p>\n
Both of these outcomes are superior to government collecting the money and spending it (in most cases), for at least two reasons.\u00a0 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.\u00a0 Second, when the government has the pooled resources at its command, it has the ability to influence behavior\u2014to make, rather than take, prices.\u00a0 That is, it can drive the market.\u00a0 Although the aggregated behavior of large groups of consumers, savers, lenders, and borrowers can do the same, they are not organized.\u00a0 None of the individuals in the group can wield the clout of the entire group.<\/p>\n
Obviously, there are some exceptions.\u00a0 There are times when we want the government to do that.\u00a0 The independent decisions of all those individuals will not usually produce enough defense, for example, because of free-riding problems.\u00a0 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\u2014one consumer and few producers\u2014other problems crop up).\u00a0 Consumers can display herd behavior, rushing lemming-like off the cliffs of Britney Spears albums or collectible dinner plates.<\/p>\n
For simply increasing productivity in a market, though, government spending is inferior to private action, because less bang comes from each buck.\u00a0 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.\u00a0 So, to return to the rebuttal of the President\u2019s claim (with the President\u2019s own slogan), we can<\/strong> cut our way to prosperity, whether as a country or as individuals.\u00a0 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.<\/p>\n Even in a macroeconomic sense, though, reducing debt would be a way of cutting ourselves to prosperity.\u00a0 That is, let us assume that the government does not decrease revenues, but simply decreases expenditures.\u00a0 If we cut spending to meet revenues, we stop borrowing money (which is more expensive to use than current money).\u00a0 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).\u00a0 Either way, we get more for the same amount of resources.<\/p>\n So yes, Mr. President.\u00a0 Yes we can.<\/p>\n","protected":false},"excerpt":{"rendered":" Well, at least I blog more often than Haley\u2019s Comet.\u00a0 Then again, he only gets Wi-Fi access like what, every 76 years?\u00a0 Somewhere, there\u2019s a graveyard containing all the brilliant blog ideas I\u2019ve had but never got to write.\u00a0 And … Continue reading