

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

What does HN think? I've put my answer to kick off discussion; as a comment.
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bmmayer1
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
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
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
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.﻿

