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There are two main arguments against government spending. The first is that governments tend to spend money much less efficiently than individuals do. There i

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.

dkural 14y ago
I find both of your arguments to be convincing. I have two criticisms / edge cases for you: - What if the taxed money is not really taken out of an active economy: In other words; what if that portion of the money would otherwise not be "invested" or spent in the US economy. What if it'd just go towards the $1.5 trillion cash pile. - Public goods are in fact a large chunk of the economy, and many things people consider 'useful spending' fall under this category. Private goods; while satisfying want, might actually not serve needs very well. Perhaps having less money to spend on coke so government can waste it on healthcare welfare is overall better?
- bmmayer1 14y ago
  Well, to your first point, I would say that even if the money is sitting in someone's bank account, it is still part of the US economy--it is leant out by banks to small businesses, it is invested in pension funds, bonds, etc...unless the money is under a mattress it is being useful. But should we decide to tax "non-useful" money, I certainly wouldn't want to be the person who had to figure out which money was being useful and which wasn't for each individual, would you? Mind you, a lot of people save money for retirement, or to pass on to children, and that's not money I would call non-useful; I would consider it quite immoral to tax that money. Yet tax it we do, since our tax code considers all taxable income to be fairly fungible. The so-called "cash pile" exists because of a credit crisis--people with money are hesitant to invest it or lend it or spend it because they are unsure what the future of the economy will be. Certainly, the government stepping in and starting to tax the cash pile will not make investors more confident to start spending again; more likely, people will start stashing the money overseas. I'm afraid I don't understand your second point--"private goods, while satisfying want, might actually not serve needs very well." The fundamental concept of economics, that of scarcity, takes as a supposition that society doesn't have the resources to meet our wants and needs; in other words, our wants and needs are unlimited. For example, it is hard to see a refrigerator as anything less than an absolute necessity today, yet it did not exist for most of human history. The brilliance of the free market is it allows individuals to maximize their own utility, to trade for the things that they want and need the most, trading off with the things they don't need as much. By your last point, I take you to mean that healthcare welfare is a better use of money than cocaine (par exemple). Certainly that may be true for each individual on his own level, but when you make it a collective action problem, you have to decide which trade-offs each individual must make between what they want and what you think they need. Cocaine is probably a bad example, but if someone is addicted, they harm only themselves if they are unable to make the tradeoff between drugs and health. But if healthcare becomes a collective action problem, then every person in society has to bear the cost of that one person's addiction. It doesn't seem fair that if I live a perfectly healthy life, I should have to pay more to subsidize someone else's cocaine habit. But fairness aside, there is also a principal agent problem in that the cocaine addict doesn't bear the full cost of his habit, and thus doesn't fully appreciate the trade-off that needs to be made for his health, likely resulting in more cocaine usage, not less.

dkural 14y ago

I find both of your arguments to be convincing. I have two criticisms / edge cases for you: - What if the taxed money is not really taken out of an active economy: In other words; what if that portion of the money would otherwise not be "invested" or spent in the US economy. What if it'd just go towards the $1.5 trillion cash pile. - Public goods are in fact a large chunk of the economy, and many things people consider 'useful spending' fall under this category. Private goods; while satisfying want, might actually not serve needs very well. Perhaps having less money to spend on coke so government can waste it on healthcare welfare is overall better?

bmmayer1 14y ago
Well, to your first point, I would say that even if the money is sitting in someone's bank account, it is still part of the US economy--it is leant out by banks to small businesses, it is invested in pension funds, bonds, etc...unless the money is under a mattress it is being useful. But should we decide to tax "non-useful" money, I certainly wouldn't want to be the person who had to figure out which money was being useful and which wasn't for each individual, would you? Mind you, a lot of people save money for retirement, or to pass on to children, and that's not money I would call non-useful; I would consider it quite immoral to tax that money. Yet tax it we do, since our tax code considers all taxable income to be fairly fungible. The so-called "cash pile" exists because of a credit crisis--people with money are hesitant to invest it or lend it or spend it because they are unsure what the future of the economy will be. Certainly, the government stepping in and starting to tax the cash pile will not make investors more confident to start spending again; more likely, people will start stashing the money overseas. I'm afraid I don't understand your second point--"private goods, while satisfying want, might actually not serve needs very well." The fundamental concept of economics, that of scarcity, takes as a supposition that society doesn't have the resources to meet our wants and needs; in other words, our wants and needs are unlimited. For example, it is hard to see a refrigerator as anything less than an absolute necessity today, yet it did not exist for most of human history. The brilliance of the free market is it allows individuals to maximize their own utility, to trade for the things that they want and need the most, trading off with the things they don't need as much. By your last point, I take you to mean that healthcare welfare is a better use of money than cocaine (par exemple). Certainly that may be true for each individual on his own level, but when you make it a collective action problem, you have to decide which trade-offs each individual must make between what they want and what you think they need. Cocaine is probably a bad example, but if someone is addicted, they harm only themselves if they are unable to make the tradeoff between drugs and health. But if healthcare becomes a collective action problem, then every person in society has to bear the cost of that one person's addiction. It doesn't seem fair that if I live a perfectly healthy life, I should have to pay more to subsidize someone else's cocaine habit. But fairness aside, there is also a principal agent problem in that the cocaine addict doesn't bear the full cost of his habit, and thus doesn't fully appreciate the trade-off that needs to be made for his health, likely resulting in more cocaine usage, not less.