Russ Nelson's blog

Sigh. Christopher Lansdown asks me to comment on his opinion piece. Okay, well, I will, but I'm not too sure he'll like what-all I have to say. It's not good, Chris, it's not good at all. At least he is not satisfied with what is taught as economics in the universities, I'll say that much in his favor.

Backing up one moment, the problem is relatively simple. You can't spend what you don't have, and so if you take in money slower than you spend it, you build up a deficit.

No. If you take in money slower than you spend it, that is a deficit. When you run out of savings, a deficit has to be covered by borrowing money to create debt.

If this doesn't change, you will eventually build up so much debt that no one will lend to you any more and everything will fall apart. Tax cuts without reducing spending is doing exactly this: decreasing income relative to expenses and thus creating a deficit which spirals out of control.

No. The problem is not that no one will lend to you any more. The problem is that they want so much in debt service that you cannot afford the debt. It is not that the deficit spirals out of control. It is that the debt service becomes an increasingly larger and larger proportion of your budget. It's not that Chris is wrong, it's that Chris is not writing clearly and carefully. I'm not always careful either, so no pejorative intended.

To get it out of the way quickly: fear of debt aside, debt is a useful tool for producing wealth. The times when you want to borrow are precisely the times when you don't have: bad economies and wars.

No, debt is not necessarily useful. Public debt is usually a sign of bad debt. When money becomes public, it is often spent more foolishly than if it remains in the pockets of taxpayers. If you're spending money because you have a "bad economy", you need to look in a mirror. Free markets are naturally resilient. It is not normal for businesses to all run into trouble at the same time. When they do, it is because a single powerful entity (aka a central government) has made a mistake. So, for the government to try to fix the economy is a misnomer: the problem was created by government action, so why does anybody expect that government action can fix it?

update: Christopher comments: "The tech bubble of the late 90s was not regulated into existence by the government, it was caused by a general excitement as well as a dutch tulip trade effect." Greenspan admits that the fed was concerned about receipt hoarding because of Y2K concerns, and that the fed printed up many new dollars and put them into circulation. Where did those dollars go? Into the stock market.

Wars are typically paid for by inflating the currency. The War of Iraq Regime Change will be no exception.

The important thing which is so often forgotten is that money is not static. If you hold spending constant over years, you are actually cutting it. Money becomes progressively worth less, and the economy continually grows.

Christopher is again half right. Money is definitely not static in value. A constant amount of money actually progressively becomes worth *more* as the economy grows. The reason Christopher has this exactly backwards is simply because governments with a central bank cannot resist the temptation to raise money by printing money. Oh, the theory is that the central bank adjusts the rate of inflation so it is equal to the rate of growth of the economy, so that the number of receipts is kept equal to the amount of the value. Great theory, but it never really pans out.

we borrow money to stimulate the economy,

No. It's not possible to stimulate the economy by taking money from people. What were they going to do with it? Keep it in their mattress? Of course, if they were going to do that, then you wouldn't be able to tell that they had it, and you couldn't tax it away from them. No, the only money you can tax is money that the owner isn't spending because nobody has persuaded him to spend it.

If you have a government populated solely with wise people, who can take money from foolish people and spend it better, then you can stimulate the economy. With the simple addition of wings, pigs can fly. Rather, there is a reason why pigs do not fly, and there is a reason why governments are not populated solely with wise people.

update: Christopher comments "What government can do in this case is force people to borrow the money and do work to create wealth. The nice thing about steel mattresses is that you do know where the money is, and can force people to spend it." Unfortunately, this requires a government wiser than the people that make it up. Where are you going to get these people when by your own accounting, the people are behaving foolishly? You can't make a silk purse from a sow's ear. Forcing people to waste money is not productive; it's just wasteful. Note: Christopher seems to be talking about what is politically possible. I acknowledge that the level of economic education is very poor (in fact that is why I write) and that people want the government to spend all sorts of money on their behalf. That is wrong, and we must be clear on that. If economists are to speak truth to power, we must say what is best for everyone, not just what is best for tax recipients.

posted at: 13:50 | path: /economics | permanent link to this entry