Tuesday, August 11, 2009

What Is The Mechanism? Or Is It Just A Miracle?

"Let me go back to Krugman’s article. I italicized an interesting phrase. Big government can work when it is run by people who understand its virtues. He should have said big government can work when it is run by people who themselves determine how well it works."
Of course, Professor Krugman says:
"So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government."
It seems to me that Professor Krugman is pretty good at politics in his commentary, and probably not so good at economics.

I think Professor Rizzo is better on the economics, and thus, his commentary exposes the politics and the politicians.

Specifically, how does "stimulus spending" of 1/2 of 1 percent of GDP save the economy from a second Great Depression? I don't see an answer in Krugman's commentary, except perhaps in the faithful reliance in Keynesian models with an "automatic stabilizer" built in. Of course, Rizzo's skepticism in a "super multiplier" is more sensible than faithful reliance.

Krugman's analysis and commentary seem to start with the extra government spending of 1/2 of 1 percent of GDP, and this seems to me to be like starting his analysis with the assumption that the money government spends grows on trees. Where did government get this extra $70 billion dollars it has spent on "stimulus?" I suppose one answer is that this money did grow on trees, or that government simply printed $70 billion extra dollar bills. Is the reason the economy was saved from a great depression that there a now lovers of government governing the economy that had the foresight to plant some new money trees? Or, should I say, has the economy been saved from a second great depression by inflation?

Another possible answer to this question about where government got the extra money is that government increased tax revenue collected. In this recession tax revenue has decreased, and thus to increase tax revenue collected government would have to raise taxes. And, how would raising taxes for this $70 billion save the economy? Tax revenues are transfers from people and businesses to government. In this regard, government is a middle-man that collects (takes) money from you and me, and then it spends that money by giving it to other people just like you and me. I suppose we can focus on just the way government spends this money and say things like "this spending has created many millions of new jobs," and this has saved the economy from a second great depression. But, I'm pretty sure that if government hadn't taken the money from you and I to begin with, you and I would have also spent or saved that money. Spending our money, instead of having it taken to Washington as tax collections, would also have been associated with "new jobs." Do you believe that government spending an extra $70 billion of revenues collected makes more jobs than the number of jobs that will be lost, or will not have been created by you and I spending our money? I don't, at least not in general. The process of transfer is costly and government is wasteful in this process, not to mention that economists have long known that taxation creates an efficiency burden on economic activity as well.

Well, so far I'm not sure that the government's "stimulus" can be accounted for by either inflation or an increase in present taxes. Of course, either or both may be in our future, and if so, then either or both will then be like "brakes" on new prosperity.

There is another way for government to get the additional $70 billion for "stimulus" spending. It can borrow the money. This also looks like a transfer from people that lend this money to the government, but in this case it really is a transfer of future income to present consumption. A key question is then how will this increased money for present consumption be paid for? Obviously the answer is it will be paid for out of future tax collections, from either ourselves and/or from our children and grandchildren. In this regard, the implications are the same as I described just above, i.e., "brakes" on new prosperity for ourselves and/or our children and grandchildren.

I don't see a mechanism by which government spending an extra 1/2 of 1 percent of GDP can possibly have saved us from a second great depression. And, it seems to me that if you do believe extra spending by government saves, then you must also believe that saving today is of greater value than the cost in diminished prosperity in the future, and that it is not unjust to take prosperity from our children and grandchildren to save ourselves today.

1 comment:

Unknown said...

Leave credit where it is due: Tax collections is, for all intents and purposes, government's most efficient enterprise. Took 4 days last April to process my tax clearing check.

If only my refunds took less than two months, I might say it is even an efficient enterprise. Alas, the "most efficient" government enterprise is a dubious distinction...not unlike the national league pitcher with the best average...