To Spend or Not 2 Spend 2

In response to my last post on this subject, intrepid reader Donald has this:

First, you have left out taxes. Spending that is paid for by taxes doesn't increase debt.

Donald is quite right, but very unfortunately, this doesn't speak to the point. I am simple minded, so let me approach the question in the simplest fashion. Suppose you are looking a cornfield ready to harvest. A lot of time and other resources have been invested in those juicy kernels. Now: what can you do with the corn?

First you can eat some of it. Second, you can sell some of it. Third, you probably ought to save some of it as seed corn for next year's crop. Some uses of the corn contribute to future corn production. Call those uses investment. Some uses do not. Call those uses consumption. Figuring out which is which is complicated. Eating corn is investment in so far as it keeps you and your labor force alive and healthy. Selling corn and buying a machine that doesn't increase production but is pretty or has a better CD player is consumption.

I think that my cornfield is a pretty good metaphor for the economy as a whole. How does government figure in? A king or a congress can seize part of the corn for its own use. That's taxation. It can buy the corn, using money taxed from someone else. It can also borrow some of the corn in return for a promise of future payment. Again, that future payment will have to be got by taxing someone. Finally, it can buy the corn with manufactured money, which has the effect of inflating the currency. That is just another, more subtle as less honest form of taxation.

The only difference between direct taxation and borrowing is that in the latter case taxation is deferred and generally more expensive. People charge interest when they lend you their ears or their dollars. Inflation is one way of reducing the expense, by reducing the value of the debt. Government can divert wealth by all these mechanisms.

What matters for the future of the economy is what government does with the wealth it confiscates. We expect government to perform many services which promote economic production. The king is supposed to clear the seas of pirates and the roads of bandits. He establishes courts that settle commercial disputes in a way that reassures everyone that their labor will be rewarded. That's investment. Government sometimes also builds gaudy temples and palaces with doors and faucets made of gold. That's consumption.

When the U.S. Government built the interstate highway system after WWII, that was investment. When government takes money out of the paycheck of a guy hammering plywood onto the roof of a new factory, and pays it out to a retiree playing golf, that's consumption. I don't mean to say that social security is a bad idea. It is the one of the most effective anti-poverty programs in U.S. history. But someone has to feed the golfers and water the greens, and it is important to recognize that fact.

So here is the question before us: is the massive spending we are doing right now contributing more to investment or to consumption? If, as Paul Krugman and other recommend, we should increase our public spending even more, would that contribute to future economic growth or would it shift even more wealth away from productive enterprises toward consumption?

The argument for more spending is based on the idea that there is a vast potential for economic production sleeping out there, a lot of people with energy, money, and ideas, just waiting for an invitation to jump into action. That was the case when government went deeply into debt during the Second World War. It wasn't government spending, but victory that reenergized the American people. Our soldiers came back home and built lots of stuff and had lots of babies who built a lot more stuff. That's how we paid back the debt.

I find that very hard to believe that we are in a similar situation, except in so far as we are going into debt just as deeply and just as fast. The modern welfare state is all about consumption. It shifts money from workers to retirees, from workers in the productive sectors to public employees. It creates vast blocks of clients who will vote against any attempt to reduce their guaranteed levels of consumption.

The healthcare bill is a case in point. Congress is great at distributing benefits, but dreadful at reducing consumption in any way that might make the distribution affordable. It wants to make cheap energy more expensive, and spend the money on green energy that has no realistic possibility of contributing to actual production in the short term.

It doesn't matter whether we tax, borrow, or inflate. We are eating our seed corn. We are mortgaging the crops that might have been grown with that seed corn. I don't see any way out of this except to stop doing the one and the other.

Comments

[Stan Gibilisco]

"So here is the question before us: is the massive spending we are doing right now contributing more to investment or to consumption?"

=> In my opinion, the question should go like this:

"Is the massive spending we are doing right now doing more long-term damage to investment or to consumption?"

I would say just about equally both. The current track, if not soon reversed, leads off a cliff into an economic malaise that will endure for the rest of our lives, and possibly also our children's and grandchildren's lives.

Within a few years, the "small people" will have nothing to invest and nothing to spend on consumption either.

I just finished reading a book by a 20th-century mystic (Osho -- gotta love it!) who said that the socialist methodology did not do a very good job of "spreading wealth around," but did an excellent job of "spreading poverty around" ...

... and I do believe that the current administration, with their professed determination to "spread the wealth around," wants to impose socialism in the United States by any (hopefully non-violent) means necessary.

In the end, we'll all be just about equally poor. Except the people in power, of course.

[Donald Pay]

Here's an idea. Since you brought up how great it was after WWII, let's go back to the levels of taxation we had after WWII.

[Donald Pay]

Let's tease apart this sentence: "It wants to make cheap energy more expensive, and spend the money on green energy that has no realistic possibility of contributing to actual production in the short term."

First, why is "cheap energy" cheap? It's cheap it externalizes most of its costs, and depends on huge government subsidies, some direct and some indirect. If oil, coal and nuclear had to account for the costs of all externalities and lost all its subsidies it would hardly be "cheap" and renewables would be very competitive.

Second, is the phrase "short-term." Turning around our energy system is a long-term project. No one is talking about replacing everything immediately. Efficiency measures are available, price competitive and can be taken immediately. The major hurdle is financing of millions of small projects. Wind is very competitive right now, and under a system that fairly prices all alternatives, wind and solar would rapid be the source of choice from a cost and environmental standpoint. Distributed energy and cogeneration are cost competitive right now.

[Michael]

How does one get a system that "fairly prices all alternatives" without subsidizing those alternatives which are currently considered unfairly priced (by whoever the fairness judge might be)?

Seems a bit tautological to claim that with fair pricing things will be (or already are) cost competitive.

[BillW]

Donald,

You rail endlessly about the massive subsidies to the oil business. Do you have any data to quantify that? In South Dakota you are paying over 42 cents per gallon in taxes on gasoline. The evil folks running BP paid $8.4 billion in taxes last year, and that is without considering the taxes paid by their employees.

I would be very curious to see any facts that demonstrate that the oil economy is so heavily subsidized that it more than offsets these taxes and is a net negative to the government. I suspect such facts do not exist and that you are merely repeating another ficticious mantra the left has conjured up to support the narrative.

On the other hand, it is clear that the wind and solar industries owe their existance to the public weal.

[KB]

Donald: I am sorry, but on the main point you are clueless. The only way that oil can be made cheap by "externalizing" its costs would be if wealth were diverted to the oil industry from other sources. That is in fact what happens with wind power and solar power, not a spark of which would be generated without massive government subsides. Wealth generated by oil and gas subsidizes wind power. If oil and gas were similarly subsidized, where would the wealth come from? Angels? Hogwarts?

Oil, coal, and natural gas are cheap because they are cheap. What flows out is worth a lot more than it cost to get it. These are obvious facts. You can't have a rational energy policy without recognizing them.

[BillW]

Economics function at two levels. At the macro level there is the matter of how much corn is being grown - how much does the country as a whole have to consume.

At a lower level is the question of the distribution of the corn - how we decide how much each person in the country gets to consume ... on a free enterprise basis such that the distribution is based on your contribution to creating the corn, or having the government sieze all of the corn and redistribute it equally among everyone regardless of their contribution.

In our national battle over the distribution question we are killing off our ability to create a big pile of corn. Liberals like Donald see everyone growing corn as inherently evil and undeserving, and are hell-bent on making corn growing so burdensome that fewer people are willing to invest their resources in growing it. The greedy 'free-marketeers on the right are equally hell-bent on getting America out of the corn business and sending all of our national wealth to China and India where people will grow corn for near slave wages, yielding a fantastic return for the corn investors on Wall Street, but at the expense of draining our national wealth.

We all sit in the middle working in 'service' jobs that do not create corn, living on money that we have borrowed personally and through government borrowings, fighting with each other over how much corn each of us should get with our borrowed money.

Unless we collectively stop killing the goose that is laying the golden ears of corn, the matter of taxes, government and distribution will soon be moot. There will be nothing left to tax and distribute.

[Donald Pay]

I like the way BillW gets things totally wrong in just about everything he says. Actually I have several relatives who grow corn, and my mom rented out her Iowa land for corn/soybeans until I inherited it. I sold it to my corn-growing uncle.

Because of my extended family's farming background I pay a lot of attention to ag issues. The real issue here is not that corn growing has been made burdensome by people like me. It is actually far easier to grow corn in the industrial way than it is to engage in the kind of integrated family agriculture that my mother grew up with, and which I, as an agricultural conservative, prefer. Corn and soybeans have been highly subsidized by government, partly because agribusiness corporations have a lot of power and they pretty much dictate farm policy, which determines not only what is economic for farmers to plant, but also what methods are economic to use to plant and harvest it. So, thanks to BillW for subsidizing my uncles. I love all my cousins, and they will get to inherit BillW's money.

Corn, by the way, is really the lazy man's crop. Plant the seed, pour on some chemicals in the spring. Spray if necessary. Harvest in the fall. Lots of time for fishing in between. One uncle used to say he spent more time "farming the tax system" than he spent in the cornfields.

[KB]

Donald: despite our frequent clashes, we agree on a lot. "Farming the tax system" is indeed a lot of farming these days. Maybe that means that government is sometimes a bad influence in the economy? Likewise wind power is a technology for turning wind energy into tax breaks and government subsides.

[BillW]

Here I thought KB was using corn as a metaphore for the economy. Now I find out, much to my chagrine, that both KB and Donald understood that this post was actually a very narrow discussion of the corn business.

You are absolutely right, Donald. Agriculture is the most heavily subsidized, clsest to socialistic area of the United States economy, and I have no doubt that you are a big proponent of taking everyone's money and giving it to farmers.