We Owe It to Ourselves

Don Boudreaux of Cafe Hayek is having a good time with Paul Krugman’s assertion that “U.S. debt is, to a large extent, money we owe to ourselves.” This bold claim comes in the midst of yet another of Krugman’s seemingly infinite number of columns touting deficit spending as a panacea for what ails the American economy.

Boudreaux’s posts (to date) are here, here, here, here, here, and here. I will not try to match Boudreaux’s deep and weighty commentary on Krugman’s outrageous assertion. Instead, I offer the following non-academic observations for Mr. Krugman’s consideration:

1. Who are “we”? If government borrows money and spends it on goodies for Congressman X, Y, and Z’s districts, how do I get my cut? Or does the happiness generated in Congressman X, Y, and Z’s districts simply radiate in waves across the country, eventually reaching me and making me feel better?

2. I know of no magical power that enables government to ensure that deficit spending absorbs unemployed resources without diverting already-employed resources from productive uses. So this leads me to ask why it wouldn’t be better to take the borrowed money and flush it down a toilet, rather than sending it to Congressman X, Y, and Z’s districts.

3. Anyway, if the borrowed money makes (some) people in Congressman X, Y, and Z’s districts better off, why is it that “we” (i.e. the rest of us and/or our descendants) end up repaying the debt that made those others better off? I don’t understand how I “owe it to myself” when (a) I didn’t ask to borrow the money and (b) I gained nothing as a result of the borrowing.

You might claim that my personal wishes are of no account because Congress and the president are duly elected by majorities of voters. But that is tantamount to saying that Congress and the president possess a kind of omniscient super-consciousness that somehow overrides the harm, hate, and discontent that flow from their acts. I don’t think you’d agree with that, given your views about the many and various “sins” committed by the Bush administration, usually with the connivance of Congress. Or, perhaps only Democrats possess omniscient super-consciousness. Yes, that must be it.

With regard to my not having gained as a result of borrowing, perhaps you think that I ought to be happy simply because (some) people in Congressman X, Y, and Z’s districts are happier as a result of deficit spending. Perhaps I should be, but I am just a curmudgeon who has 12 grandchildren who will be less well off because of the extra taxes that I, their parents, and/or they will pay for the privilege of making some strangers happier. Are you telling me that you — or anyone — has a way of making everyone happier by making a lot of people  less happy? Or are you telling me that you don’t care who is made less happy as long as government does what you think it should do? My money is on the latter proposition.

If I do, indeed, owe some portion of the U.S. debt to myself, I hereby forgive my share of the debt and absolve myself of any obligation to pay it.

Does World War II “Prove” Keynesianism?

In “How the Great Depression Ended,” I say that

World War II did bring about the end of the Great Depression, not directly by full employment during the war but because that full employment created a “glut” of saving. After the war that “glut” jump-started

  • capital spending by businesses, which — because of FDR’s demise — invested more than they otherwise would have; and
  • private consumption spending, which — because of the privations of the Great Depression and the war years — would have risen sharply regardless of the political climate.

That analysis is by no means an endorsement of simple-minded Keynesianism (as propounded by Paul Krugman, for example), which holds that the government can spend the economy out of a recession or depression, if only it spends “enough” (which is always more than it actually spends). But there is no point in pumping additional money into an economy unless the money elicits productive endeavors: business creation and expansion, leading to net capital formation and job creation.

Pumping additional money into government programs results in the misdirection of resources, at best, and in the discouragement of productive private activity, at worst. Discouragement takes two forms: crowding-out and active interference (usually through regulatory inhibitions).

The answer to the question of this post’s title is that World War II has nothing to do with Keynes or Keynesianism, as it is widely understood. Employment and output (measured in dollars) rose sharply during World War II, but most of the additional output was devoted to the war effort. Huge increases in government spending did not lead to huge increases in the material well-being of Americans, most of whom were working harder while being deprived of the fruits of their labors, through rationing.

If anything, the post-war recovery “proves” the folly and wastefulness of efforts to stimulate an economy through government spending. It was not government spending that re-started the U.S. economy after World War II, it was private spending on capital investments and consumer goods. Some of that private spending was encouraged by the end of regime uncertainty. That end was brought about by the curtailment of New Deal initiatives (until the 1960s) because of the war and FDR’s death. Private spending — which was boosted by wartime saving — would have been purely inflationary had businesses not been willing and able to create jobs and expand output.

A Short Course in Economics

In which I begin with pithy statements of principles and work my way toward more complex (but brief) explorations of selected economic issues.

1. Self-interest drives us to do good things for others while striving to do well for ourselves.

2. Profit is good because it entices invention, innovation, and investments that yield new and better products and services.

3. Incentives matter: Just as self-interest and profit drive progress, taxation and regulation stifle it.

4. Only slaves and dupes can be exploited. (Wal-Mart employees are not exploited; they are not forced to work at Wal-Mart. Anti-Wal-Mart activists are exploited; they’re dupes of the anti-business Left.)

5. There is no free lunch, all costs (including taxes) must be covered by someone, somewhere, at some time.

6. The appearance of a free lunch (e.g., Social Security, tax-subsidized health insurance) leads individuals to make bad decisions (e.g., not saving enough for old age, overspending on health care).

7. Paternalism is for children: When adults aren’t allowed to make economic decisions for themselves they don’t learn from mistakes and can’t pass that learning on to their children.

8. All costs matter; one cannot make good economic decisions by focusing on one type of cost, such as the cost of energy.

9. The best way to deal with pollution and the “depletion” of natural resources is to assign property rights in resources now held in common. The owners of a resource have a vested interest (a) in caring for it so that it remains profitable, and (b) in raising its price as it becomes harder to obtain, thus encouraging the development of alternatives.

10. Discrimination is inevitable in a free society; to choose is to discriminate. In free and competitive markets — unfettered by Jim Crow, affirmative action, or other intrusions by the state — discrimination is most likely to be based on the value of one’s contributions.

11. Voluntary exchange is a win-win game for workers, consumers, and businesses. When exchange is distorted by taxation and constrained by regulation, the losers are workers (fewer jobs and lower wages) and consumers (higher prices and fewer choices).

12. Absent force or fraud, we earn what we deserve, and we deserve what we earn.

13. The economy isn’t a zero-sum game; for example:

Bill Gates is immensely wealthy because he took a risk to start a company that has created things that are of value to others. His creations (criticized as they may be) have led to increases in productivity. As a result, many people earn more than they would have otherwise earned; Microsoft has made profits; Microsoft’s share price rose considerably for a long time; Bill Gates became the wealthiest American (someone has to be). That’s win-win.

14. Externalities are everywhere.

Like the butterfly effect, everything we do affects everyone else. But with property rights those externalities (e.g., pollution) are compensated instead of being legislated against or fought over in courts. Relatedly . . .

15 . There is no such thing as a “public good.”

Public goods are thought to exist because certain services benefit “free riders” (persons who enjoy a service without paying for it). It is argued that, because of free riders, services like national defense be provided by government because it would be unprofitable for private firms to offer such services.

But that analysis overlooks the possibility that those who stand to gain the most from the production of a service such as defense may, in fact, value that service so highly that they would be willing to pay a price high enough to bring forth private suppliers, free riders notwithstanding. The free-rider problem isn’t really a problem unless the producer of a “public good” responds to requests for additional services from persons who don’t pay for those services. But private providers would not be obliged to respond to such requests.

Moreover, given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay.

I conclude that there is no “public good” case for the government provision of services. It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand. (See this post, for instance, which also links to related posts.)

You may ask: What about environmental protection? Isn’t it a public good that must be provided by government? No. Read this and this. Which leads me to “market failure.”

16. There is no such thing as “market failure.

The concept of market failure is closely related to the notion of a public good. When the market “fails” to do or prevent something that someone thinks should be done or prevented, the “failure” is invoked as an excuse for government action.

Except where there is crime (which should be treated as crime), there is no such thing as market failure. Rather, there is only the failure of the market to provide what some persons think it should provide.

Those who invoke market failure are asserting that certain social and economic outcomes should be “fixed” (as in a “fixed” boxing match) to correct the “mistakes” and “oversights” of the market. Those who seek certain outcomes then use the political process to compel those outcomes, regardless of whether those outcomes are, on the whole, beneficial. The proponents of compulsion succeed (most of the time) because the benefits of government intervention are focused and therefore garner support from organized constituencies (i.e. interest groups and voting blocs), whereas the costs of government intervention are spread among taxpayers and/or buyers of government debt.

There are so many examples of so-called public goods that arise from putative market failures that I won’t essay anything like a comprehensive list. There are, of course, protective services and environmental “protection,” both of which I mentioned in No. 15. Then there is public education, Social Security, Medicare, Medicaid, Affirmative Action, among the myriad federal, State, and local programs that perversely make most people worse off, including their intended beneficiaries. Arnold Kling explains:

[T]he Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.

The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers’ unions, know who they are. The losers — the working poor, children stuck in low-quality school districts — have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.

As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.

17. Borders are irrelevant, except for defense.

It is not “bad” or un-American to “send jobs overseas” or to buy goods and services that happen to originate in other countries. In fact, it is good to do such things because it means that available resources can be more fully employed and put to their best uses. Opponents of outsourcing and those who decry trade deficits want less to be produced; that is, they want to shelter the jobs of some Americans at the expense of making many more Americans worse off through higher prices.

For example, when Indian computer geeks operate call centers for lower salaries than the going rate for American computer geeks, it makes both Indians and Americans better off. Few Americans are computer geeks, but many Americans are computer users who benefit when they pay less for geek services (or the products with which geek services are bundled). Those who want to save the jobs of American computer geeks assume that (a) American computer geeks “deserve” their jobs (but Indians don’t) and (b) American computer geeks “deserve” their jobs at the expense of American consumers.

See also this, and this, and this.

18. Government budget deficits aren’t bad for the reason you think they’re bad.

Government spending is mostly bad (see No. 15) because it results in the misallocation of resources (and it’s inherently inflationary). Government spending — whether it is financed by taxes or borrowing — takes resources from productive uses and applies them to mostly unproductive and counterproductive uses. Government budget deficits are bad in that they reflect that misallocation — though they reflect only a portion of it. Getting hysterical about the government’s budget deficit (and the resulting pile of government debt) is like getting hysterical about a hangnail on an arm that has been amputated.

There’s no particular reason the federal government can’t keep on making the pile of debt bigger — it has been doing so continuously since 1839. As long as there are willing lenders out there, the amount the amount of debt the government can accumulate is virtually unlimited, as long as government spending does not grow to the point that its counterproductive effects bring the economy to its knees.

For more, see this, this, this, and this.

19. Monopoly (absent force, fraud, or government franchise) beats regulation, every time.

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists,” even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe (see No. 13), in which “winners” must be balanced by “losers.” Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

What about those “immense” monopoly profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. I must expand on some of the points I made in the original portion of this commandment:

  • Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.
  • Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.
  • Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.
  • The prospect of monopoly profits entices more invention, innovation, and entrepreneurship, which fuels more economic growth.

20. Stay tuned to this blog.

Are We Mortgaging Our Children’s Future?

Or, what will the “stimulus package” stimulate?

Congressional Democrats used to depict George W. Bush’s tax-rate reductions as fiscally irresponsible. The real problem, for Democrats, wasn’t that tax cuts might cause the national debt to swell. The real problem, for Democrats, was the prospect of having less money to spend on things that Democrats like to spend money on.

Now that Democrats control the White House and both houses of Congress, fiscal irresponsibility is all the rage (among Democrats). It seems that an increase in the national debt isn’t fiscally irresponsible if (a) it results from Democrat policies and (b) it’s caused not by lower taxes but by huge government spending programs.

Predictably, some Republicans have reverted to the old GOP line that deficit spending mortgages our children’s future (or some such thing).  The flaws in this assertion are exposed very nicely here, by professional economists.

However, the suggestion that the national debt represents inter-generational theft does hint at an essential truth. The burgeoning size and influence of government (which is the cause of the burgeoning national debt) amounts to theft — period:

1. Government spending (whether financed by taxes, borrowing, or money creation) commandeers resources that could have been used to produce goods and services in the private sector. Government spending diverts those resources to uses deemed “beneficial” not by producers and consumers but by politicians and interest groups.

2. Some of the commandeered resources are devoted to the payment of government employees for the purpose of making work for them, which includes the  writing and enforcement of regulations that hinder economic growth. Other resources are commandeered for the purpose of transferring purchasing power from productive members of society to less-productive and unproductive ones, thus penalizing and discouraging the traits that drive economic growth: hard work, thrift, innovation, and entrepreneurship.

3. The net effect  — near-term and long-run — is to reduce total economic output below what it could have been.

In other words, the “stimulus package” doesn’t simply “mortgage our children’s future.”  It does a lot more than that. Like all government spending that isn’t undertaken for the protection of Americans from foreign and domestic predators, the “stimulus package” mortgages our present, our future, our children’s future, and their children’s future, ad infinitum. The real problem isn’t the size of the national debt, it’s the size of government.

The best way to stimulate the economy is to reduce the tax and regulatory burdens that stifle hard work, thrift, innovation, and entrepreneurship — words that don’t seem to be in Democrats’ vocabulary. On the contrary, Democrats (Barack Obama, in particular) are bent on increasing the tax and regulatory burdens on Americans, especially those upon whom growth most depends.

As Friedrich Hayek explains, in The Constitution of Liberty,

the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

The answer to the question asked at the beginning of this post: The “stimulus package” (and other Obama initiatives) will stimulate a massive growth in the size and intrusiveness of government. Greg Mankiw agrees (here and here, for example).

Further reading:
Curing Debt Hysteria in One Easy Lesson
The Real Meaning of the National Debt
Debt Hysteria, Revisited
Why Government Spending Is Inherently Inflationary
Joe Stiglitz, Ig-Nobelist
A Simple Fallacy
Ten Commandments of Economics
Professor Buchanan Makes a Slight Mistake
More Commandments of Economics
Productivity Growth and Tax Cuts
Risk and Regulation
Liberty, General Welfare, and the State
Do Future Generations Pay for Deficits?
The Laffer Curve, “Fiscal Responsibility,” and Economic Growth
And much more, here.