Search This Blog

Wednesday, December 19, 2007

Skeptical Optimist Watch: You Pay for It!

As regular readers of this blog know, I have no problem with the government borrowing money in order to finance its spending, especially with the deficits relative to GDP at the current low levels. However, whether government spending is financed with taxes or borrowing, it has an immediate cost when the spending occurs. The cost is not deferred just because the money is borrowed instead of being paid for by taxes.

In a recent post, Steve Conover wrote:
... the false premise [is] that everything the government buys must be paid for right now with tax receipts or spending cuts, or else we shouldn't do it.
Everything the government buys incurs a cost right now. Every new program is paid for now by foregoing other potential consumption and/or investment. Either it's paid for by foregoing other specific government programs, or it is paid for by consuming or investing less in unforeseeable ways in the private sector. Just because you can't identify exactly what consumption and/or exactly which investments don't happen does not mean you're not redirecting current resources. It also doesn't much matter if taxes or borrowing are used to suck resources from the private sector into the government.

What I'm pointing out is the distinction between the financing of spending and the spending itself. I absolutely agree that financing by borrowing is perfectly okay, especially when in the range of just a few percent of GDP. However, the cost is immediate at the point of spending. Resources (labor, tangible capital assets, etc.) are now deployed because of the spending. When the government spends money, those resources are no longer available for other productive purposes.

Again, the financing method chosen in order to deploy the resources is immaterial. But when scarce resources like labor are deployed somewhere, they cannot also be deployed somewhere else. That is an immediate and unavoidable cost which we have no choice but to "pay" as we "go".

There are possible exceptions. If unemployment is quite high, then labor intensive programs don't necessarily have much of a cost since those resources were not deployed anyway. However, I believe that 4.7% is low enough such that incremental government spending on labor will transfer resource from the private sector to the government. The lower the unemployment, the closer to unity this effect will be.

I have no problem with the government spending money. But let's not pretend that there's no cost just because we use borrowing as the method of financing that spending. There is cost, and it's incurred at the point of spending (deploying the resources), unless those resource would not have been otherwise deployed.

No matter what, when the government spends money, you pay for it.

30 comments:

Harry Eagar said...

Well, duh.

So we would all naively think.

However, the orthodox view among GOP economists is that 'borrowing' is 'saving.'

That would be why 'lending' to people who have no 'income' would be regarded as 'economic growth.'

I kid you not. After 1992, when Hurricane Iniki ruined the island of Kauai, the GOP economists calculated the insurance payments for destroyed property as 'growth,' since they were inputs that would not otherwise have been made.

Bret said...

harry eagar wrote: "However, the orthodox view among GOP economists is that 'borrowing' is 'saving.'"

Sort of.

If the government borrows instead of using taxes to finance some spending, then more money (the untaxed money) remains in the private sector which could be saved or invested.

Again, it's important to maintain the distinction between finance and tangible resources.

Howard said...

After 1992, when Hurricane Iniki ruined the island of Kauai, the GOP economists calculated the insurance payments for destroyed property as 'growth,' since they were inputs that would not otherwise have been made.

That kind of thinking actually stems from demand centric approaches that predominate in the economic mainstream and the fantasy of Keynesian based macro models. Very few GOP economists can escape from this mindset, even fewer Democrats.

It's also an example of the famous broken window fallacy.

As for the original post, Milton Friedman stated clearly that government spending is the real burden placed upon the economy regardless of how it's financed.

Harry Eagar said...

'Milton Friedman stated clearly that government spending is the real burden placed upon the economy regardless of how it's financed.'

He was a fool.

If you want, to take an example that would be obvious to anybody but a Chicago Schoolboy, a road network, you're only going to get it through government.

Howard said...

Harry,

Friedman was a bit doctrinaire on some matters for my taste, even when he was correct. His ideas on monetary policy were correct at some level but impractical as prescribed for implementation and also too demand-centric in nature. He was too positivist for me but you should love that (I'm more Hayekian on the role of policy). Alas, if we were as idiotic as Milton Friedman, society would be more advanced than it is. As per your example: the Chicago Schoolboy, Ronald Coase, offers an example of why it's demonstrably false:(scroll down)

Economists from John Stuart Mill to Paul Samuelson had confidently asserted that lighthouses by their very nature could not be supplied by private enterprise, Coase noted, there being no way to collect tolls from ship-owners who benefited from their warnings.

Samuelson in particular had argued that, even if it were possible to price the service, it was better that governments should provide it, as it were, "for free." Why? Because once a lighthouse was in place, it would cost nothing extra to let one more ship avail itself of its warning. Any ship discouraged from entering local waters by the prospect of the price it would have to pay would represent an economic loss to society.

The implication was that, even if it were possible for private lighthouse operators to charge for their services, they should not be allowed to do so.

Then Coase proceeded to sketch the history of light houses in England and Wales.

He described how an institution known as Trinity House -- today we would call it a quasi-non-governmental authority or "quango" -- had evolved out of a medieval seaman's guild whose objectives had included maritime safety. How Trinity House applied for a charter to regulate harbor pilots in 1513. How it gained the right to regulate seamarks and buoys in 1566 and built its first lighthouses early in the 17th century.

When Trinity House abruptly stopped building lighthouses in 1610, Coase noted, private developers stepped into the gap, financing at least 10 lighthouses during the next 65 years while Trinity built none. At the time, Sir Edward Coke told Parliament: "Projectours like watermen looke one waye and rowe another; they pretend publique profit, intend private."

Instead of the government-sanctioned "light dues" charged by Trinity House, developers persuaded ship-owners to sign up in advance for voluntary tolls. Rather than go out of business, Trinity House finally returned to it, contracting out to private builders development rights for sites on which it held patents. In the 19th century, Trinity House purchased 14 of the 56 English lighthouses that remained in private hands, presumably in hopes of lowering light dues.


(remove egg from face)

Harry Eagar said...

Sorry, that's not how it worked. Stevenson's history of English lighthouses tells a different story.

From an economics viewpoint, the difficulty Trinity House had was that there was not enough traffic to support adequate seamarks.

Thus tolls (which were, in effect, taxes) were set very high per passage.

Private contractors no more built lighthouses than they built roads at the same time.

What happened was that the explosion of traffic in the 17th c. -- with tolls still set at medieval levels per passage -- gave private projectors a chance to reap monopoly rents. (As part of port tolls, which were municipal taxes, or they wouldn't have been collected at all.)

There were additional complications about jurisdictions among the different chapters of the Brethren of Trinity House which I have mostly forgotten, and also complications with competing technologies, but anyhow, the free market did not leap up and provide lighthouses.

Stevenson's history also sketches the evolution of lighthouses elsewhere in Europe and No. America. Nowhere did Chicago
Schoolboy universal economic principles produce lighthouses.

The earliest lighthouses were the result of eleemosynary foundations.

What you are describing is an early, more successful version of FedEx's attempt to destroy the public mails.

Howard said...

Sorry indeed. Your characterization may be reasonable or not. Given your habit of blaming all the worlds ills, real and imagined, on free market capitalism and giving private activity short shrift I withhold judgment pending further research. Since I'm an advocate of the importance of limited government and not minimalist government the result provides nothing meaningful to alter my perspective. In contrast, an obvious disdain for profit and money making which you have expressed is a greater impediment to understanding competing ideas about political economy.

Harry Eagar said...

Reasonable?

We're not reasoning this out from first principles. We're observing how people make their livings.

Stevenson had no objection to profits. He built lighthouses and got rich on it.

Coase misrepresented the lighthouse business to make an ideological point. Nothing unusual there. I notice Orrin posted another phony Amity Shlaes' article to the same effect a couple days ago.

You'd think -- well, I would -- that if free marketeering was so good, its fans could find honest arguments for it.

Here are a couple of provocative quotes from Sven Beckert's 'The Monied Metropolis: New York City and the Consolidation of the American Bourgeoisie, 1850-1896':

'Economic liberty was elevated as an end in itself, and not, as before, an integral part of the democratic republic.' (p. 219)

'In an ironic twist, in their embrace of laissez-faire ideology, bourgeois New Yorkers called upon the state to enforce the laws of the market. Their own power depended on an institution that they saw at other times as an unnatural intervention into economic laws. In a further twist, while bourgeois New Yorkers called upon the state to defend their interests, they were hostile to efforts by the state to support those of workers.' (p. 288)

Voila! The panic of 1893.

I used to ask Orrin all the time, don't results count?

aog said...

Don't results count for what? We observe, in the real world, a very strong correlation between minimalist / free market governments and economic growth / wealth. We can even observe how nations that turned from free markets to more socialism stagnated (Argentina, Sweden, Germany). Based on this, your argument is that free markets aren't a good idea? Or is that since free markets don't generate optimal (in you view) results every time in every situation, they're not the best choice?

Bret said...

harry eagar wrote: "...bourgeois New Yorkers called upon the state to enforce the laws of the market."

That's the problem. Many groups, rich and poor, call upon the state to help line their pockets. The point is to limit the state's involvement in all such activities as it's very inefficient and often oppressive.

Harry Eagar said...

Panic of '37, Panic of '93, Panic of '07, Crash of '29.

How come we haven't had any of those since the New Deal?

Now, that's what I call results.

Bret said...

It is plausible that the deadweight anchor of government that slows down economic progress and makes us substantially poorer may also help to mitigate the forces that cause crashes, providing that short term benefit.

However, it's also plausible that the diversity of our modern economy and the relative sophistication of those at the monetary levers also insulates us from such disruptions.

aog said...

Moreover, IMHO one should count the panic of '29 against government economic intervention, not against the free market. That would have been an historical footnote like the other ones absent the sort of active intervention Mr. Eager supports, c.f. the panic of 1987.

Harry Eagar said...

Bret, you need to brush up on your Kindleberger. I recommend 'Manias, Panics and Crashes.'

There's one reason and one only for the lack of crashes -- government as lender of last resort. (I don't suppose you recall why the market tanked in '87?)

As for the idea that government intervention turned a minor market correction in 1929 into a massive depression, the histories of previous crashes and the facts surrounding the Depression work against it. (It was a curious time. The government was interfering in production but not in finance. The crash originated in finance, not production. Surprise, surprise.)

I noticed, on Orrin's blog, another lying piece by Shlaes peddling that crap. Shlaes is lying, and she knows it and I know it.

Not my fault if nobody else reads Tugwell these days.

Bret said...

harry eagar wrote: "There's one reason and one only for the lack of crashes -- government as lender of last resort."

Lender of last resort falls under "the relative sophistication of those at the monetary levers" that I mentioned above. However, there are other factors involved in crashes and it's overly simplistic to think that there'll never be another serious crash as long as the Fed makes the money flow adequately.

harry eagar wrote: "As for the idea that government intervention turned a minor market correction in 1929 into a massive depression, the histories of previous crashes and the facts surrounding the Depression work against it."

Depends who you ask. According to Higgs it was more of the threat of intervention than any actual intervention:

Higgs's thesis in this chapter, which is backed by data (including interesting data on bond yields from the mid-1920s through the mid-1950s), is that the Great Depression was prolonged and deepened by the "regime uncertainty" created by FDR and the New Deal. As it turns out, Uncle Sam never engaged in wholesale nationalizations and other whacky central-planning schemes -- but no one in the 1930s knew what the future held. For investors back then to believe that any investments they made in the U.S. might be confiscated or regulated to smithereens was not unreasonable, given the rhetoric of the time and the shift in policy brought by FDR and his "brain trust."

This "regime uncertainty" stifled investment, keeping the economy stagnant.


harry eagar also wrote: "...another lying piece by Shlaes..."

Now tell us how you really feel, Harry - don't hold back! Which piece was that exactly?

Harry Eagar said...

It's the same dead horse she's been beating for years. She wrote a book about it and has been regurgitating pieces of it in the WSJ from time to time.

Orrin linked to the latest chunk, in which she adduced the resignation of 5 dairy workers as evidence that FDR did not understand the economic multiplier of mechanization.

Of course, if you read Tugwell -- as Shlaes must have done -- you know that the facts were exactly the opposite.

Roosevelt's initial impulse was to use priming funds just to get as many men back on a payroll, even moving leaves around, as possible; until Hopkins persuaded him -- without much difficulty, if Sherwood is right -- that there would be a better multiplier effect from ordering heavy equipment, thus creating one job in manufacturing and another in construction, instead of just one in leaf-raking.

I am just a provincial newspaper reporter without a library nearby. But if I can run down Tugwell's contemporary statements, then Shlaes in New York ought to be able to. If Shlaes's editors are too dumb to spot her tricks, not my fault.

As for Mr. Higgs's highly speculative idea, I used to be interested in the history of the automobile industry. Higgs should immerse himself in the back issues of Automobile Quarterly, which used to run a feature almost every issue about new auto manufacturing companies that were capitalized during the Great Depression. There were dozens of them.

You never heard of any of them, except perhaps Cord, because they all failed. It wasn't very productive investment but it was investment.

'Let's go down to the Trans-Lux and hiss Roosevelt.'

Bret said...

harry eagar wrote: "...new auto manufacturing companies that were capitalized during the Great Depression..."

Higgs did NOT say that there was NO capitalization. Only that there was insufficient capitalization due to the possibility of nationalization. Perhaps that's why they all failed.

As far as Tugwell goes, I'm sorry if I consider a buddy of Stalin and a prime architect of the New Deal to be a biased, non-objective, and unreliable source when it comes to the cause of the longest severe economic downturn in the country's history. He's one of the reasons that people might've assumed everything was going to be nationalized.

I don't know about Shlaes, but if it's her word against Tugwell's, well, I need more evidence before considering Shlaes to be lying.

Harry Eagar said...

The idea that Mellon was right, and that if the losers had been liquidated, the market would have stepped in to rehab the economy is disproven by the fact that, starting in 1922, US agriculture was liquidated, and it didn't come back.

Nobody wanted farms at any price (because of deflation, duh). Millions upon millions of acres were abandoned. Fear of nationalization could not have been the reason: This all happened during Coolidge Prosperity.

The fate of the Nebraska deposit insurance system, which failed even before Hoover was elected, tells the tale.

Funny how things work out. The capitalists fled to fascism because they thought it would guarantee their property at the expense of their souls.

Turned out, they lost both.

Markets are powerful tools but likely to kill you if you don't know how to control them.

Bret said...

harry,

I'm a little lost with respect to your last comment. I'm not sure how Mellon, liquidation, and 1922 fit in with the depression.

Perhaps you were addressing something else?

Harry Eagar said...

Yes, I know you are lost.

The depression in agriculture started in 1922; ag finance had collapsed by 1927.

Mellon's advice to liquidate manufacturing/commercial enterprises didn't come till '29 or early '30, when he finally noticed that the economy had failed.

Ag had already failed but, as an industrialist, Mellon didn't care.

The point is that agriculture had been liquidated to zero: you could have farms for nothing.

Yet, contrary to the sappy arguments of Shlaes, etc., capital did not then flood in and revive ag.

There is no reason to suppose that it would have done so with manufacturing, either; and, in fact, it didn't.

Stock prices had fallen by over 90% in some sectors but after 5 years, there was no sign of revival.

As Harry Hopkins said, people don't eat in the long run, they eat every day.

Market corrections that drive people below the subsistence level are intolerable. Captitalism failed big time in the '20s, and not just in America. The invisible hand was nowhere to be seen.

You may want to restudy Tugwell, Bret. And stop reading Cato screeds.

The famous visit to Stalin was in 1927, when the NEP was still in effect. Bukharin had not yet been deposed, and Russia was industrializing rapidly -- surprisingly rapidly, in Tugwell's estimation -- by following a moderate market-oriented policy.

Tugwell deplored Bolshevik violence, which is more than most capitalists managed to do with fascist violence, but the change in direction of USSR economic policy didn't come until 1928.

Come on, learn some history.

Howard said...

Harry,

In your understanding - was deflation the primary culprit or just an adjunct to the Great Depression?

aog said...

"As Harry Hopkins said, people don't eat in the long run, they eat every day."

Then how did they eat in the USA after 1922, with agriculture collapsed and not revived?

"the change in direction of USSR economic policy didn't come until 1928".

Perhaps you should learn some history -- the NEP was a change in USSR economic policy, which obviously predated 1928. And it was clear that the NEP was temporary, until things were going well enough to revert to the original Bolshevik policies.

Harry Eagar said...

I don't think you can separate things out like that.

The deflation in ag would have eventually depressed manufacturing (no customers) and must have been acting that way before the crash.

And the crash would have happened even if ag hadn't been deflating, because bubbles always burst.

The wicked combination of the two (plus other unhappy factors, like the tariff) presented the open market economy with a greater problem than it had ever faced. It could not cope.

It hadn't done very well facing the lesser problems, either, but it's difficult to see on what grounds anyone thinks the economy would ever have recovered by being left alone. (The German economy 'recovered' by uber-inflation, but was just about to collapse again by '38; one thing few Americans realize is that in the '20s 500K Germans, mostly young men, emigrated to the US because there were no jobs in Germany, and after 1933, almost all went back, so we had to kill them.)

Deflation does not in itself crash economies. The long, long deflation of the late 19th c. created all sorts of problems for business -- see, for an amusing take on one industry sector, Henry Petroski's 'The Toothpick' -- but generally business expanded -- with painful hiccups -- despite the deflation.

No economy can stand endless boom, it seems. Bret's idea that without government intervention, the US economy would have expanded even faster in the past 70 years stumbles against two items: 1) no economy has ever expanded faster than the US economy in 1947-72; and 2) except for the Great Depression, the US economy has always been short of labor.

It's been a long, long time since a shortage of capital was the principal constraint on US expansion, although the news hasn't filtered in to 100 Liberty St. yet.

Bret said...

harry eagar wrote: "The depression in agriculture started in 1922; ag finance had collapsed by 1927."

Note that one of the factors for the hardships in agriculture was the huge increase in productivity in that sector starting in the mid-to-late 1800s due to mechanization and transportation. At that point there needed to be many, many fewer farms. The market delivered! It may have overshot just a wee bit, but it wasn't like there was mass famine during the depression.

harry eagar also wrote: "Yet, contrary to the sappy arguments of Shlaes, etc., capital did not then flood in and revive ag."

Of course not, there were too many farmers. The farmers needed to move on.

Harry eagar also wrote: "There is no reason to suppose that it would have done so with manufacturing, either; and, in fact, it didn't."

Per Higgs, the market wasn't gonna do diddley until people were confident there investments and efforts weren't going to be nationalized. Also, the government further badly distorted the markets.

harry eagar wrote: "Come on, learn some history."

History seems to be different in your alternate universe. I know the history of mine.

harry eagar also wrote: "Bret's idea that without government intervention, the US economy would have expanded even faster in the past 70 years stumbles against two items: 1) no economy has ever expanded faster than the US economy in 1947-72; and 2) except for the Great Depression, the US economy has always been short of labor."

Re (1): the plural of anecdote is not data - let's destroy Europe and Asia and set our economy back on severe war footing and see if we don't grow a bit faster from there.

Re (2): yes, that'd be because the darn government uses so much labor.

harry eagar also wrote: "The deflation in ag would have eventually depressed manufacturing (no customers)"

How about other manufacturing workers for customers - food was cheap so plenty of money left over fo? We have far fewer people working ag now, yet there seem to be enough customers for manufacturing.

harry eagar also wrote: "It's been a long, long time since a shortage of capital was the principal constraint on US expansion..."

I agree that a shortage of capital is not the main constraint. a big constraint is a large and inefficient government sector. Without that anchor holding us back, we'd make faster progress.

Harry Eagar said...

How would we make faster progress? If you haven't heard, we're short of skilled labor now and the trend for that is down, not up.

The reason the lack of disposable income among farm families was a problem for manufacturing in the '20s was that farm families made up something like two-fifths of all families. When they didn't buy radios, RCA stock had to collapse.

And there were not too many farms or farmers. In 1916, the government asked the American farmer to expand production as far as possible. Which he did, heroically, although not sufficiently. There were not, you see, enough farms or farmers then.

Come 1919, and the purchasing missions were no longer coming around. farming did have to contract. The Republicans, free marketeers to a fare-thee-well, let the market take care of itself, which was a disaster.

No doubt about it, Tugwellian approaches could have eased American agriculture down to a lower production level without devastating 50 million people's lives and, indirectly, the non-farm economy.

We know that because when Tugwell got in the driver's seat, ag did revive.

Market solutions are frequently disasters, and the idea that situations cannot be managed is mighty strange. Few corporations fail to plan.

I just yesterday encountered an example of how free markets operate worse than government supervision and in this case, the resource the market is wasting is not renewable and absolutely vital: helium

Don't results count?

aog said...

But the results in the very case you are citing originate in government, with its demand to expand agricultural development. So the pattern is, the government intervenes, sets up a problem, and then it's the free markets fault it can't clean up the government's mess?

Harry Eagar said...

Well, whaddaya want, to lose the war?

It was not true, to start with, that there were too many farms in 1913. Remember, when farmers used to talk about 'parity,' the time when farm receipts and non-farm incomes were supposed in a correct balance, their benchmark was 1913.

(This is US ag only; we were feasting on exports then, and farming in Europe was not economically healthy.)

The first Hart-Peerless tractor had not yet been built. (Hart-Peerless was the first internal combustion engine farm tractor.)

Government spent some money on research but otherwise, 1913 ag was about as close to an open market as you can get. The big exception being, of course, regulation of railroad rates.

However, since railroads had semimonopoly power over farmers, in this case regulation probably had the net effect of either enhancing competition or, at least, of dampening monopoly rents. Free market economists usually like it when monopoly rents are dampened. Or pretend to.

So, even if the government hadn't asked for all out production, farmers would have expanded production -- they had already begun to -- because Europe wanted to buy.

Government interfered by helping to guarantee the safety of shipping and, when the Europeans ran out of money, by providing credits.

Nothing there that a resilient economic system ought to have been unable to deal with.

Result: disaster.

No doubt in my mind anyway that a managed (and temporary, Tugwell never intended the AAA to be permanent) contraction could have led to a soft landing.

As a genius named Dan Sanford (whoever he was) said, experience is what you get when you don't get what you want.

It is not hard to see, politically, why Americans had no stomach in 1932 for letting the market do to them what it had done in 1922.

Results may not count on Wall Street, but they do in the voting booth.

aog said...

"and temporary, Tugwell never intended the AAA to be permanent"

Then Tugwell's an idiot who hadn't learned from history. Such things are rarely, if ever, temporary. And FDR clearly didn't intend it to be temporary either, as his comments on similar things like Social Security make clear.

Harry Eagar said...

Where do you get this stuff?

You understand, do you not, that Roosevelt ran as a conservative Democrat with a pledge to reduce government spending?

Fortunately, he was disabused of that, in the nick of time.

Since AAA and NRA were explicitly temporary, emergency measures -- very temporary as it turned out -- the idea that they were intended to be permanent needs some demonstation.

Finally, of course, in 1933 there was plenty of precedent for termination of a big federal program: income tax.

aog said...

"that Roosevelt ran as a conservative Democrat with a pledge to reduce government spending"

Don't results count? FDR fundamentally transformed the USA federal government from a relatively limited one to a big spending, interventionist one. What's the biggest component of federal spending today? Where did that originate? Do results count only when they support your view?