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Ask HN: Thoughts on private versus government spending (for growth)?

1 points by dkural 14y ago

What does HN think? I've put my answer to kick off discussion; as a comment.

dkural 14y ago
These are basically my thoughts on the subject - as naive as they may be; I'm looking for greater enlightenment. I start by claiming/assuming that growth is one of the best ways out of the woods for the US economy. Without taking a stance on either candidate; I'd like to point out that economically; the correlation between tax cuts / tax increases v.s. growth is weak; except for the extremes - and for the following reason: It's all about who'll spend it faster. If the government spends that money; the economy will grow. If the people who got the tax cuts spend that money; economy will grow. With that in mind; let's look at the American case. Currently, US companies are sitting on top of > $1.5 trillion in cash in their US accounts. I applaud their decision not to spend this in face of weak demand. If you build another factory you won't be able to sell the goods.. etc. Thus - if we give people with high income / companies more cash through tax cuts; it is unlikely that they'll invest this to create jobs; mainly due to weak demand. They don't currently lack the money to invest; they simply think the returns don't justify the investment. On the other hand; if the government were to just pay down debt in the short term with the money it would keep right now; this wouldn't help the economy much either.<p>The income of the middle class of this country has been declining in real terms for the past 30 years; which is killing demand everywhere. They need to be able to buy all the stuff companies produce. The middle class needs a tax cut & higher incomes. If there will be a tax cut; it should go to the middle class; because they'll spend the money. Also, I'd like the government to keep some of the money and spend it. I'd like this to be spent in education; infrastructure; and science - areas of high return in the long term as well as the short. I'd like the government to invest in upgrading the national infrastructure - bridges, roads, rails, energy distribution.. which means the companies getting the contracts get a lift. They will need and will procure everything from welders to bricklayers to cement .. The whole construction sector benefits.<p>I'd like to see NSF + NIH spending to increase. This is an investment in the American military so it can keep its technological edge. It is also the lifeblood of the technology and biotechnology industries - the crown jewels of the American economy. I'd like to see investment in education; because many low-skilled jobs are not coming back. In the long term; an investment in education is the best indicator of macroeconomic success for a country. So - it's not about tax cuts v.s. government. It's about a) who gets the tax cuts, will they spend it? b) how will the government spend the money? I'd like to see the candidates talk more about that.
bmmayer1 14y ago
There are two main arguments against government spending. The first is that governments tend to spend money much less efficiently than individuals do. There is much truth to this; if you think about market efficiency with distributed buyers and sellers, all trying to maximize utility individually, vs. purchases made by consensus--whether its textbooks or social spending like welfare--where there is a principal agent problem. The mantra goes, very few people spend other people's money better than they spend their own. So whereas the money might very well end up in the pockets of contractors who hire workers and create jobs, these jobs don't necessarily have to be productive. It was Keynes who gave the example of the government paying people to dig holes and fill them up. Certainly, this would be government spending that created jobs, but would it be good for the economy? If you take a labor theory of value, that the wealth of a society is the sum value of the goods and services the society produces, then that isn't the case. It is also apparent from a historical perspective that command economies are far outperformed by free ones. People simply work harder and produce more if they are working for themselves and not for others. This generates more value which generates more wealth which generates more growth, prosperity, and jobs. The second argument against government spending is that there really is no such thing as government spending. The government doesn't have any money on its own; it only has money that it borrows through debt, raises in taxes, or creates via inflation. For the government to spend money in the economy, it needs to get money from the economy. No additional value is created; the cycle is only perpetuated. Frederic Bastiat, who developed the notion of opportunity cost, said it best in his essay That Which is Seen and That Which is Not Seen. It is easy to see the benefits of government spending when it arises (contracts going to construction workers, teachers, etc), but much harder to see the tradeoff of where that money is not being spent; for instance, money that would have circulated through the economy had it not have been paid to the government in taxes. The exact example he used, in fact, was of a natural disaster sweeping through a town and destroying buildings. Arguments will be made, he said, that the economy will be helped by the jobs necessitated by the cleanup and rebuilding. But these arguments ignore the money that would then not be spent on the economy had the disaster never come through in the first place. The fact is, a natural disaster destroys value, and that's that. So a general rule of thumb is that public spending is not really good for growth, and anything that can be taken care of by the private sector should be. There are obviously public goods that cannot be efficiently managed privately, like roads and bridges, but these make up a fraction of the actual government spending today on growth. In general, increased public spending does not create growth, it merely recirculates money through the economy much less efficiently.

1 points by dkural 14y ago

What does HN think? I've put my answer to kick off discussion; as a comment.

These are basically my thoughts on the subject - as naive as they may be; I'm looking for greater enlightenment. I start by claiming/assuming that growth is one of the best ways out of the woods for the US economy. Without taking a stance on either candidate; I'd like to point out that economically; the correlation between tax cuts / tax increases v.s. growth is weak; except for the extremes - and for the following reason: It's all about who'll spend it faster. If the government spends that money; the economy will grow. If the people who got the tax cuts spend that money; economy will grow. With that in mind; let's look at the American case. Currently, US companies are sitting on top of > $1.5 trillion in cash in their US accounts. I applaud their decision not to spend this in face of weak demand. If you build another factory you won't be able to sell the goods.. etc. Thus - if we give people with high income / companies more cash through tax cuts; it is unlikely that they'll invest this to create jobs; mainly due to weak demand. They don't currently lack the money to invest; they simply think the returns don't justify the investment. On the other hand; if the government were to just pay down debt in the short term with the money it would keep right now; this wouldn't help the economy much either.<p>The income of the middle class of this country has been declining in real terms for the past 30 years; which is killing demand everywhere. They need to be able to buy all the stuff companies produce. The middle class needs a tax cut & higher incomes. If there will be a tax cut; it should go to the middle class; because they'll spend the money. Also, I'd like the government to keep some of the money and spend it. I'd like this to be spent in education; infrastructure; and science - areas of high return in the long term as well as the short. I'd like the government to invest in upgrading the national infrastructure - bridges, roads, rails, energy distribution.. which means the companies getting the contracts get a lift. They will need and will procure everything from welders to bricklayers to cement .. The whole construction sector benefits.<p>I'd like to see NSF + NIH spending to increase. This is an investment in the American military so it can keep its technological edge. It is also the lifeblood of the technology and biotechnology industries - the crown jewels of the American economy. I'd like to see investment in education; because many low-skilled jobs are not coming back. In the long term; an investment in education is the best indicator of macroeconomic success for a country. So - it's not about tax cuts v.s. government. It's about a) who gets the tax cuts, will they spend it? b) how will the government spend the money? I'd like to see the candidates talk more about that.

bmmayer1 14y ago

There are two main arguments against government spending. The first is that governments tend to spend money much less efficiently than individuals do. There is much truth to this; if you think about market efficiency with distributed buyers and sellers, all trying to maximize utility individually, vs. purchases made by consensus--whether its textbooks or social spending like welfare--where there is a principal agent problem. The mantra goes, very few people spend other people's money better than they spend their own. So whereas the money might very well end up in the pockets of contractors who hire workers and create jobs, these jobs don't necessarily have to be productive. It was Keynes who gave the example of the government paying people to dig holes and fill them up. Certainly, this would be government spending that created jobs, but would it be good for the economy? If you take a labor theory of value, that the wealth of a society is the sum value of the goods and services the society produces, then that isn't the case. It is also apparent from a historical perspective that command economies are far outperformed by free ones. People simply work harder and produce more if they are working for themselves and not for others. This generates more value which generates more wealth which generates more growth, prosperity, and jobs. The second argument against government spending is that there really is no such thing as government spending. The government doesn't have any money on its own; it only has money that it borrows through debt, raises in taxes, or creates via inflation. For the government to spend money in the economy, it needs to get money from the economy. No additional value is created; the cycle is only perpetuated. Frederic Bastiat, who developed the notion of opportunity cost, said it best in his essay That Which is Seen and That Which is Not Seen. It is easy to see the benefits of government spending when it arises (contracts going to construction workers, teachers, etc), but much harder to see the tradeoff of where that money is not being spent; for instance, money that would have circulated through the economy had it not have been paid to the government in taxes. The exact example he used, in fact, was of a natural disaster sweeping through a town and destroying buildings. Arguments will be made, he said, that the economy will be helped by the jobs necessitated by the cleanup and rebuilding. But these arguments ignore the money that would then not be spent on the economy had the disaster never come through in the first place. The fact is, a natural disaster destroys value, and that's that. So a general rule of thumb is that public spending is not really good for growth, and anything that can be taken care of by the private sector should be. There are obviously public goods that cannot be efficiently managed privately, like roads and bridges, but these make up a fraction of the actual government spending today on growth. In general, increased public spending does not create growth, it merely recirculates money through the economy much less efficiently.