On the 10th February, I wrote an article entitled Every Economist, Mr President? No Sir! The thrust of my argument was “that the unemployment rate would have been much lower today had the stimulus program never occurred.”
That post also appeared on my own Blog and there attracted a fascinating response from Rick Rutledge. Rick’s response is worthy of a separate article, as below, together with my reply.
Sherry,
The problem with your explanation here is that it states that “government spending is funded with taxes that WOULD HAVE BEEN invested by private industry” and that “the unemployment rate WOULD HAVE BEEN much lower today had the stimulus program never occurred.” (Emphasis mine.)
This argument, it seems to me, is predicated on the conceptual fiction of a two-dimensional relationship between government spending and business investment, with taxes as the lever. That model lacks a time vector, not so much from omitting it, as compressing it. The relationship between those factors can only be simplified to this level by compressing all time into the representational plane.
That is to say that, to fairly represent the relationship between government spending and business investment (via taxation), we have to compress three presumptions into one premise:
– Past government spending that resulted in increased taxes diminishes past, present, and/or future business investment resources;
– Increasing present taxes to fund present and future spending diminishes business’ investment resource pool.
– Past, present, and future government spending without matching funding WILL, EVENTUALLY result in increased taxation, diminishing future business investment resources. (And, consequently, MAY have a chilling effect on present business investment attitudes.)
However, unless NPR has let me down (it could happen), and I’ve missed a big, breaking story about an increase in business taxes, these stimulus programs have been wholly funded by deficit spending.
Of course, it could be argued that deficit spending generally COULD (nay, should) have a chilling effect on business investment. This, together with the third presumption of the aggregate premise above (that is to say, burgeoning national debt), does create a basis for the belief that the unemployment rate COULD have been much lower today, IF a number of things had been done differently. The French have a saying: “With enough ‘IFs,’ we could put Paris in a bottle.”
To simply state that “the unemployment rate would have been much lower today had the stimulus program never occurred” strikes me as conclusory, and the sort of reasoning on which our elected officials too often rely to justify partisan and ideological positions.
Too, and unfortunately, there is a great body of evidence to suggest that business leaders have historically taken a disappointingly short-sighted approach to management, so I would be reluctant to put too many eggs into the “chilling effect” arguments.
Rick Rutledge
As a person who teaches financial literacy, I’m fully aware that sometimes there are urgent needs that justify the use of leverage (and short-term deficit spending) to deal with near-term emergencies. Credit has its uses. I’m of the belief that short-term deficit spending is not the primary (and certainly is not in and of itself) the cause for our current woes. I’m more inclined to believe that short-sightedness, whether in the form of The Quick Buck on Wall Street, or a systemic refusal to acknowledge the looming problem of the national debt, is more to blame than any single short-term stimulus program. Government spending on stimulus, OUTSIDE THE CONTEXT OF DEFICIT SPENDING, wholly evades your argument.
(But then, there may be good reason I don’t claim to be an economist – through no fault of yours, to be sure!)
Rick Rutledge
This was my reply:
Hi Rick,
Goodness. Where to begin! I simply stated my conclusion because it’s a post, and I was responding directly to Obama’s claim about what “all” economists think or say. He was misinformed or stretching the truth, and I wanted to point out that fact. So, yes, there were a lot of unstated underlying assumptions and data and studies and research and theory that I did not specify. Apparently you’ve supplied some of your own to try to deconstruct the “reasoning” or “ideology” that I might have used to arrive at my conclusion! Creative and ambitious but, alas, wrong.
You’ve ignored or misunderstood the very essence of causality: the only thing one needs to know is that business profits are the ONLY source of tax revenues to the government, and when the government takes and spends those tax revenues, they are spending dollars that WOULD HAVE BEEN RETAINED AND INVESTED by the business that created those profits and those very tax revenues IN THE FIRST PLACE, and would have then caused further profits next period. CAUSED. And it doesn’t matter whether you talk one period or multiperiod or lags. This fundamental economic fact does not change.
You bring deficit spending (the relation between this period’s G and this period’s T) and the level of debt (cumulative deficits) into the picture, both of which are entirely irrelevant to the issue I am raising and, worse yet, are the accountant’s version of business profits.
You site “evidence” that business leaders have been short-sighted (do please share some of that evidence with me — cite the source and let me have at it — it will not hold up) and use that to conclude that government spending does not reduce economic wealth? And then literally blame our current woes on the short-sightedness of business? or on national debt? huh?
You say: “Government spending on stimulus, outside the context of deficit spending, wholly evades my argument.” Not so. My point is that when the government takes a dollar of tax revenues, whether the government is running a deficit or surplus, it reduces the economic wealth of the economy relative to what it would have been had the government not taken that dollar of business profits as taxes. Very simple. Very straightforward. The plain, simple, unadorned, incontrovertible truth.
Thanks for your interest and for taking the time to write such a thoughtful, thought-provoking comment!
Learning from Dogs has been publishing on a daily basis since July 15th, 2009. That’s over 460 posts and is a great tribute to the commitment of all the authors of this Blog. We are grateful that our regular readership is also measured in the hundreds and is growing steadily.
Elliot Engstrom
It seemed time to make a small change. We have decided to include articles from Guest Authors on a regular basis. Our first guest is Elliot Engstrom.
Elliot Engstrom is a senior French major at Wake Forest University, and aside from his schoolwork blogs for Young Americans for Liberty and writes at his own Web site, Rethinking the State
Elliot first post for Learning from Dogs is about the US Federal Government and Poverty. This also appeared in The Daily Caller.
————–oooOOOooo—————-
The federal government, which claims to be the greatest supporter of those in need, is anything but a friend of the impoverished.
Often times when conservatives speak of the government treating the rich differently than the poor, the discussion is framed around taxes and welfare, with the argument being made that the government forces the highest earners to pay a massive percentage of all taxes, both punishing success and stifling overall economic productivity and making it all the more difficult for anyone not in the upper echelons to accumulate wealth for themselves. I sincerely hope that I have not constructed a straw man version of this common conservative argument, as I certainly think it has a great deal of credibility. However, I also would like to draw attention to the fact that while government loots the rich through the direct means of taxation, it likewise loots the poor, albeit through a different set of means that is much more difficult to recognize, and thus much more difficult to counteract.
While looting the wealthy can often be construed as some kind of humanitarian effort to aid the poor, looting the impoverished is a much more difficult enterprise to disguise as a moral good. Thus we will find that the government’s means of taking money from the poor are much more difficult to detect, comprehend, and eliminate than the means of direct taxation that is used to extract money from the wealthier members of society.
The dollar in which the majority of Americans receive their wages or salary has no absolute, set value. We see this in the fact that the value of the dollar is constantly fluctuating when compared to gold, silver, or the currencies of other nations (which are all constantly fluctuating in value themselves). “Value” is determined by a wide range of factors, but is based in the fact that human beings are all rational maximizers who are all trying to get what they want while expending the least amount of resources possible to do so. The occurrence of this phenomenon in the mind of every single individual economic actor coordinates the price system in a free market economy.
A given worker making $10.50/hour may see himself as bringing home a constant source of income. However, this is not the case at all due to the constantly shifting value of the dollar. Even in a free and unhindered market, the value of the dollars that this worker takes home each day would fluctuate based on factors like how much liquid currency was actually in existence in the market, how many resources had been invested in banks or stocks, and what amount of resources had been converted into physical capital or products. In the end, the dollar itself has all the value of a flimsy piece of cotton paper – it derives its true value from the productive activities of economic actors who use it as a medium of exchange. In other words, the dollar is a widely accepted “I.O.U.” This would be the case even in the freest of economies. Values of commodities and currencies are always changing based on the effectual demand and effectual supply of the moment.
But, as we all know, we live in anything but a free and unhindered economy. Our supposed “free market” is criss-crossed with a Federal Reserve System that manipulates the value of the dollar at will, a corporate welfare system that socializes the losses of corporations at the expense of the rest of society, and law enforcement policies that weigh the heaviest on those who do not have the time or resources to easily deal with court and lawyer fees, jury duty, and detainments prior to trial, not to mention the fact that the War on Drugs does substantially greater damage to the lower classes of American society than it does good, particularly when speaking of poor African-Americans.
And here’s the scary part – this was all the case before the bailouts and stimulus package that George Bush began and Barack Obama continued and amplified. Not only do these bailouts threaten to massively inflate our currency, spelling disaster for those whose livelihood is based in hourly wages paid in dollars, but it also directly took from all of society, not just the rich or the poor, and gave to a few select corporate entities such as Goldman-Sachs and Wells Fargo. We know this because every new dollar created by the government in the stimulus plan detracted from the value of every dollar already existing in the pre-stimulus economy (or will do so when released into the economy).
Does this sound confusing? It should, because it is, and that’s exactly how the federal government likes it.
While the federal government would tell us that they protect the poor from the exploitation of the rich, economics would tell us that it is in fact the federal government itself that is the greatest exploiter of our nation’s impoverished, and it is this institution that in fact facilitates much of the disparity in wealth between wealthy national corporations and impoverished local communities.
Those of the small government mindset who wish to rally more people to their cause should not go about proclaiming that we should be immediately getting rid of affirmative action and welfare for the poor, but instead should be putting forth a rallying cry against corporate welfare, an inflation-minded Federal Reserve System, and a law enforcement system whose economic penalties weigh heaviest on those with the least money in their savings accounts. It does not have to be out of selfishness that we advocate for a reduction of the federal nanny-state. It can, and should, instead be out of a concern for the poverty and destruction of wealth that is directly generated by this institution’s misguided policies.
Learning from Dogs 