Friday, February 17, 2012

Stimulus and Austerity

I tried to keep it short and focused. I really tried!

Spending Too Much
First we need to differentiate between the government and the society. This is an extremely important difference. To say that country X spends too much can mean two completely different things.

(a) On the one hand, it can mean that its government spends more than it takes in in taxes.
(b) On the other hand, it can mean that the country, the entire society, imports more goods than it exports, which necessarily is either financed with debt, by printing money or by sending people in other countries to work there and send the money back home.

Having people work in other countries is sub-optimal for their families but it's sustainable. Printing money can be sustainable but leads to several problems which originally encouraged Southern-European countries to want to help create and then join the Euro. What is not sustainable is to finance the imports with external debt for forever.

However, this post is about point (a): Governments which spend more than they take in with taxes.

Government Revenue
A government spends money to meet its obligations. But to be able to spend the money it first has to get it. There are basically three ways to do this.

(a) Printing money
Printing used to be a very common source of government revenue in the past and it's still important nowadays. In the very long-term printing money causes inflation. Inflation means that all goods and services become more expensive. As people then can buy less with the money they have, inflation causes a subtle inflation tax.
But inflation is never a smooth process. The money first flows to e.g. a bank and then may even stick to specific markets and cause bubbles. But in the very, very long term, if there's suddenly twice the amount of money in the economy, but the same goods and services are traded with its help, all prices double.

Keep in mind that the very, very long-term is often irrelevant for reality. Prominently, J. M. Keynes said “In the long run we are all dead”. This isn't so much a statement about your children as an attempt to make clear that the long-term is often rather unimportant when there are things happening in the short-term all the time. Or, in other words, if you printed money and then waited for 100 years without anything else of significance happening, the long run were important. But if important things happen all the time, the constant short-term consequences matter at least as much as the long-term consequences, if not more.

There isn't really a limit to printing money. And since politicians in democracies need to appeal to voters to be elected, printing money is considered a very bad practice. The ECB is as independent as possible from politicians for this reason. The FED is not that independent but it knows the consequences of unlimited printing to pay for government programs (I hope).

For these reasons, let's ignore printing money as a source of government revenue. More important for modern government financing are debt and taxes.

(b) Debt
We need to differentiate between internal and external debt. Japan would be an example for internal debt. This means that the Japanese citizen gave loans to their government. Argentina or Russia are examples for (mostly) external debt. The rest of the world gave loans to these governments. The distinction is very important.

You might have noticed that Japan has a much higher debt/gdp ratio than almost any country on earth. That's possible because nobody expects them to default on their debt. And the reason is that it wouldn't benefit Japan. In fact, since rich individuals, and organizations controlled by rich individuals, are the main owner of government debt papers, and exactly these individuals, in all societies, have a major impact on the decisions of the government, it's considered improbable that Japan defaults anytime soon.

This is quite the contrast to Argentina, Russia, and even Greece where the debt was and is to a large extend external. The government would gain a lot by defaulting - which is why investors stop lending money much sooner to Greece than to Japan. Of course, ever increasing internal debt is not sustainable for Japan, either. But the debt/gdp ratio, at which investors are unwilling to finance the government any more, is much, much higher than in Argentina, Russia, Greece .. and maybe the US.

Internal debt means that a government asks its own people to give them money now, in exchange for the promise to pay the money plus an interest back in the future. If a country defaults on its internal debt, it redistributes immense amounts of wealth from the creditor citizen to the government (which is “owned” by the entire society). For the rest of this post I mean internal debt when I say debt.

As long as a government does not default on its debt, debt causes a redistribution of wealth from the tax payers to the receivers of interest payments. It is for that reason that I will never understand why people who consider themselves 'left' like debt so much. Germany, since 1949, has payed a multitude of what it was loaned in interest rates. We constantly redistribute wealth from taxpayers to those who own our bonds!

(c) Taxes
Taxes, just as internal debt, is money which flows from the people to the government who usually promises to spend it in their interest. The difference to internal debt is that those who give the money get nothing in return (except for the promise that the money will be put to good use).

The Economy
For the purpose of discussing the effects of government spending on the internal economy, we need a very simply model. This model consists of two sectors: the public sector and the private sector. Both sectors consist of nested organizations which, at the lowest level, are individuals.

The public sector uses the government revenue (taxes+debt) to buy things from the private sector. It is controlled by the government to be efficient and not corrupt. The organizations in the private sector are controlled by the respective owners to be efficient and not corrupt. There's not much difference so far. The government officials have just the same incentive (from the electorate) to keep their organizations efficient and not corrupt, as have the private owners (from their desire to maximize profit). The difference is that the struggle for efficiency and against corruption is the more difficult, the larger the organization. And the organizations in the public sector, by necessity, are often very large.

The public and private organizations are nested into each other and they trade with each other. Trade means that they pay each other to do something for each other. The entire system is driven by consumer spending. Ultimately, everything which is produced (goods) and offered (services) needs to have a final benefit for some individual.

The system is also dynamic. At all times, new organizations are formed, old ones destroyed, their interactions change, the way they are nested change, etc. However, most relationships are pretty stable. Most organizations (including the ones on the lowest level, the individuals) don't change their suppliers and customers very often. There's inertia.

Some of the individuals in this system can become unemployed. This means that they don't supply any organization with their labor and thus (usually) can't demand any goods or services because they have no money to offer. When this happens these people are outside the system. They just don't do anything and eventually die due to starvation. The problem is that when you're outside the system you are irrelevant - unless you find a way to become able to supply some organization with your labor; and do this in a way which doesn't cost you money, because you don't have any.

Of course, the case can be made that *somebody* has always an interest in teaching you how to be able to supply him with your labor. In a knowledge-based economy this is, however, much harder than in earlier economies. Trying to turn a 50-year old blue-collar worker into a scientist is a pretty risky thing. That's why the rest of the economy usually gifts the unemployed money so that they don't die and maybe can even educate themselves so that, in the future, they may be able to supply labor and thus demand goods and services again.

The system includes an estimation of the future supply/demand by allowing loans and debt. This means that someone might give you money if you promise to give it, plus an interest, back in the future. And he might take your presumed future ability to repay the loan, considering your ability to now spend the money he just gave you, into account. It's a pretty ingenious system, really.

The system has a tendency to create very rich individuals. These individuals don't actually consume all the money they own, but rather invest most of it. Investing means to spend the money to buy something other people offer (e.g. their labor) and use this to create something which other people (hopefully) demand in the future. If more goods and services are to be created, investment is always necessary. At all times there are usually a few opportunities to invest money. These opportunities are seized in a specific order: the presumably most profitable first.

If you have no idea at all where to invest your money you leave it at the bank. This means that the bank has more money which it can loan, thus driving down the price (interest) the bank will ask for loans. And this will increase the likelihood that somebody, who does have an investment idea but no money, takes up this loan. So, unless you put the banknotes underneath your bed, the money always flows towards some kind of investment.

Stimulus and Austerity
A stimulus plan, as well as austerity, have in common that they create a sudden change in the economy.

With an austerity package, the public sector suddenly demands less and, correspondingly, the government takes up less debt. This means that money which would otherwise have ended up in the hands of the government now ends up at banks. These banks loan the money to some investor and thus the money creates private investment instead of public investment.

With a stimulus package it's really the same: the public sector suddenly demands more and, correspondingly, the government takes up more debt. This means that money which would otherwise have ended up in the hands of the private sector now ends up in the hands of the government. The bank loans less money to some investor but that's ok, because the money now creates public investment instead of private investment.

So the question boils down to who knows better what to do with the money and the answer is not clear. It simply depends on the parts of the public sector which grows (stimulus) or shrinks (austerity). If you have no army, it might be a good public investment to get one. If you have an army which is too large it is a good idea to shrink it.

Of course, the government can also redistribute the money. For example by lowering taxes or by increasing unemployment benefits. But fact is that money never sleeps and as long as there's somebody who has an idea about what to do with a loan and as long as the government doesn't waste the money, it doesn't really make much of a difference whether the public or the private sector spends the money.

You don't believe this? Good for you because its wrong. There are a few reasons.

Globalization means that the money doesn't stay at the local bank. It can go anywhere.

With austerity, the government cuts down on expenditures. Consequently, less loans got to the government and instead somewhere into the private sector. But the money doesn't necessarily go to the local bank where somebody gets a cheaper loan to realize a good investment idea. Instead it goes to Brazil where someone had a really good investment idea. The probability that the highest profit can be made in any specific country is, at all times, low in a globalized world.

That's why reducing taxes on the rich doesn't really do all that much for the local economy. The rich can invest the money in Chinese factories or to buy German cars. Or they can just buy a house in Spain. And they often do!

Public investment programs, however, are better: A new highway can be required to be built by a local company. A new school can be required to be built by a local company. And not only do these actions actually create work for local workers, they even add a school or a highway! And the money which was used to pay the local workers might have ended up somewhere in Russia for another oil pipeline if it hadn't been taxed away or raised with a new bond. That's why, in an open economy, public investment programs are better at fighting unemployment than lowering taxes.

In a way, an open economy is leaking. In a closed economy it doesn't really matter whether the public or the private sector spends the money. It is spent anyway and the only reason to spend it publicly is that something which has to be payed for publicly (like any army) has to be paid. But in an open economy giving somebody money doesn't make him invest it in the local economy. Instead, it can go anywhere; and it does. Investment programs are guaranteed to create local jobs. If they also create something the country needed anyway (like a better school or a new bridge) it's even better.

Creative Destruction
Another problem is that creation takes more time than destruction and that all parts of the economic system have some inertia.

If you close a government organization, the local workers will be unemployed. Maybe, after a while, they find another job which pays worse. But that's not good for them and neither is it good for society.

Sure, the money which was 'freed' from public use, went to a private bank and was loaned to some private investor. But this investor needs to consider the facts. And the facts are that the workers available were good at working in that now closed public factory; not at some other job. They first need to learn how to work on the new job and while they do, they are less productive. And that's bad for everybody; not only for the workers.

Even worse: good investment ideas take time. Those workers might not actually find a new job soon enough. And while they are unemployed they lose their qualifications. In fact, it's worse: after a year nobody wants to employ them anymore because they don't wash themselves, because they don't own a shower anymore. And they stink.

Of course, if the public factory was full of waste and didn't produce anything useful, not much is lost when it is closed. But modern societies are rather good at controlling waste in the public sector: look at China. There's no reason to assume that just because the government pays you, you work less hard. And there's no reason to assume that a politician whose job depends on the government programs not being wasteful has less incentive to fight waste than a shareholder. The manager who is employed by the government and payed depending on how many goals he reaches as a CEO, is just as effective as the manager who is employed by 30,000 anonymous shareholders. In fact, you could make the case that the publicly employed manager has better and stronger incentives!

But the basic problem is: creation doesn't happen as fast a destruction. And this effect has dire consequences when too much is destroyed too fast. Greece's economy shrank at 7% over the last year. That's a depression; a bad one. The unemployed lose their qualifications ...

The final problem I'd like to mention is inequality. It's not like there's not enough demand on the planet. It's just that most people can't buy all they desire and a few people could not spent all their money even if they tried. Even though money always finds a way into another investment, this investment necessarily is something which is going to produce goods or services which are demanded by someone who has the money to buy them!

That's why it's possible that millions of people want a car, while at the same time millions of people who can build a car are unemployed! If you don't consider this a flaw in the system I really don't know what to say.

The End
At the end of this long, not at all complete and terribly unfocused post, let me say that the current mix of our economic systems is the best this planet has ever seen. We need to remember this while we try to make the economic systems even better.


  1. Anecdotal 'evidence' abounds, but when I hear (from credible sources) about Greece having jobs of literally nothing, well that's pure waste: things like committees to drain lakes, which had been dry for decades, that sort of thing. They might as well have just called it a welfare program and saved some administrative costs.

    On the other hand, Greece was just responding to incentives. When they were given a much stronger currency, of course they're going to buy more! The entire country won the lottery and we've seen how that tends to turn out. If banks had been responsible, they'd have recognized that regardless of the currency, Greece had real problems with productivity relative to consumption. They should have responded by charging higher interest rates in Greece years ago, not now when it's too late.

  2. Printing money depends on the amount. Was long term to the Weimar Republic 100 years or more like 2-5 years? So if you expand your US M3 by double in a year you will see inflation in the short term. It happened to too many countries and this was just one mistake that Keynes made.

    It is controlled by the government to be efficient and not corrupt. And herin lies the fundamental error. Government has never been efficient and it has usually been corrupt. No one can name any government that has not wasted billions or that did not have billions stolen or given to the politically connected. If I'm wrong name one government that this was not the case for.

    Also government hardly ever changes. In the US we still have government agencies that came about in the early part of the last century and have had their original mission completed decades ago. They just never die. More proof of inefficiency or flat corruption.

    Now you will cite many corporations that also were inefficient or corrput. I agree, but here's the difference. A consumer has the option to NOT buy the product or service. The corporation is forced to change or not get any revenues. The government just raises taxes and the consumers (taxpayers) have no recourse. They are forced to pay.

    Stimulus vs Austerity: You left out one major point. The government doesn't produce anything nor make a profit. So when stimulus goes up the people getting it either pay off debt, save it or spend it. If they spend it this creats more demand but only for as long as the stimulus lasts. In Austerity the bank loans people money and they create products. They can make a profit and the demand lasts as long as the product is viable. This is a HUGH difference. It's why Keynesian just doesn't work in the long term. Now IF the government made products and made a profit this could change the equation if the stimulus was used for that purpose.

    And you left out that the local company with the good idea helps exports. That highway doesn't. And you conviently left out that the stimulus money given to the people can be used to by foreign goods (imports). So please try to be fair.

    And at least in the US there is not a single study that shows public investment is better at fighting unemployment then private industry. Show me one please.

    Finally, to make this short let's use your two factions (public and private) but look at the ratio of one to the other. If private is 90% and public 10% then it isn't ahrd to fund public. But as they approach 50% each that means 100% of the private money is needed to fund public. And what happens if public is over 50%?

    Add on top of this the situation where public pays more to its employees than private. You soon get all workers leaving private to join public.

    I can go on but space requires I stop here.

    1. Google up (I'd paste it except for the stupid tracking links)

      Macro-Economic Relativity: Government Spending, Private Investment and Unemployment in the USA

      According to that research, government spending does appear to have some strong stabilizing effects. Furthermore, one of the time periods, between 1970 and 1988 showed that reductions in government spending were not, contrary to hopes, compensated by private investment.

      Private investment is much more efficient in the long term, but it is also subject to more volatility, as suggested by Nil's remarks about globalization. People don't deal well with volatility, and ultimately, for better or for worse, the people are the voters.

  3. Correction I said M3 I meant M2. M2 and inflation has shown a very close and timely (not 100 years) correlation going all the way back to 1876 in the US. See:

    1. I'm with you that one shouldn't print too much money, Goodmongo. That's why I ignore it right after I introduce it in the post and look at debt and taxes. Just one thing: Whether something grows at 6% pa over 10 years or at 2% pa makes a difference of about 50% after the ten years. So, even though the graph looks like inflation is predictable it's not THAT predictable :). But I give you that to mention 100 years in this context didn't make much sense.

      On replying to the rest of your and others' comments , I'll probably make another post in a few days.

  4. @Klep: They might as well have just called it a welfare program and saved some administrative costs.

    I would disagree here. As much as I am liberal, I vastly prefer "dig a hole, fill in a hole" welfare as opposed to "check in at the welfare office" welfare. At least with the former, you are still capable of learning skills/knowledge and are in a habit of going to work everyday. When I think about all the wasted potential of workers with 99 weeks of unemployment, I shed a tear. We are already paying the unemployed, why not get even 1% usable work out of them?

    @Goodmongo The government just raises taxes and the consumers (taxpayers) have no recourse. They are forced to pay.

    Err... what? Taxpayers have the option to vote candidates into office, or the option to opt out of the government (self-deportation). If you are trying to make the cynical claim that things never change in the political realm, you're just claiming that not enough people agree with your philosophy.

    The government doesn't produce anything nor make a profit.

    I always raise an eyebrow at these kind of statements. Are you suggesting governments have no value?

    If you agree they have value, how can you suggest they produce nothing or don't make a profit? It may be more difficult to calculate the appreciation (or depreciation, I suppose) in value from year to year, but if value exists only because government exists, then government in fact produces said value.

    And at least in the US there is not a single study that shows public investment is better at fighting unemployment then private industry. Show me one please.

    I'm confused as to what you're asking for here. Private companies have been sitting on record profits these last few years by not hiring anyone. Are you saying that giving these companies more money would cause them to hire more people? Why would it? They could simply pocket the money and/or give out huge bonuses to their CEOs and other executives and still not hire anyone.

    1. This time around, I don't think it's so much that people are just lounging at the welfare office, but more to do with actual labor demand destruction.

      As for the article on how private companies sitting on record profits, is the 12% increase between 2007 and 2011 adjusted for inflation? The fact that they mention the previous number is not adjusted, makes me think it isn't - in which case it closely matches average inflation.

      The reports on business confidence I've been reading for the past several months do echo the statement that hiring is not going to come back until sales prove to be sustainable. Confidence took a horrible spill middle of last year, likely caused by the budget impasse. But at least it's positive again.

  5. @Azuriel:
    "I would disagree here. As much as I am liberal, I vastly prefer "dig a hole, fill in a hole" welfare as opposed to "check in at the welfare office" welfare. At least with the former, you are still capable of learning skills/knowledge and are in a habit of going to work everyday."
    I agree with this. But I think if people are literally doing nothing, not even 1%, that is only teaching worse habits. To be clear, I agree with you, I just don't think that was the case in Greece.

    "The government doesn't produce anything nor make a profit."
    Does a budget surplus count? That has happened.
    But even if we ignore that, so what? Profit is not the only indicator of productivity. Look at any non-profit firm. Profit is a way to redistribute productivity, it is a motivator, not a societal benefit.

  6. @Azuriel: Your "jobless recovery" point deserved to be raised. It is probably the most visible manifestation of the way productivity gains are pocketed by corporations instead of benefitting the working class and exerting a deflationary effect, which they had up to around the 1970s.

    I am afraid that I'll have to swerve around you in the left lane on welfare vs workfare, though. Not because I disagree in principle, but because I feel very strongly that make-work spending (infrastructure, etc., which is a very effective way to channel stimulus money) ought to be kept separate from the safety net. There's nothing politicians love more than to treat the underemployed (in terms of skills, hours, etc.) as properly employed, problem solved.

    One more thought on Greece: I know it's very fashionable to slag off the Greeks, and especially public sector Greeks, as the most idle and corrupt people ever to walk the earth, but it is important to remember the country's recent history. Greece, Spain and Portugal were dictatorships as late as thirty years ago. The sickly-sweet miasma of deficit spending and lax tax enforcement played a significant role in bolstering public satisfaction with democracy. It's not an investment with an easily calculated return, but surely not meaningless.

  7. This is very-very tangential to the discussion (which I enjoy reading but it's kind of over my head to comment on reasonably), but Russia? Hadn't they paid off almost all of their external debt? Wikipedia seems to think so...

  8. > Public investment programs, however, are better: A new
    > highway can be required to be built by a local company.
    > A new school can be required to be built by a local
    > company. And not only do these actions actually create
    > work for local workers, they even add a school or a
    > highway!

    Unless the new highway in Switzerland is created by a German company with cheape Polish workers living in barracks for the duration of the construction.

    Globalization also drains your public investments. :)

  9. The government doesn't produce anything nor make a profit

    Hmmm. Lets see. What would the profit level of american corporatations be if the government hadn't build our flood control system, our national highway system, subsidized the expansion of our telephone and power transmission systems into every corner of the country. The money they spent on spaceflight created TRILLIONS of dollars of technology that companies benefitted from. NASA tech is in everything you do today, the paint that stripes our roads, the newer cheaper roads that we build, computer technology, food technology, medicine, clothes, and hundreds of other things too numerous to list.
    Our public vaccination program that took us from 100,000's of thousands of children's (adults make the numbers even worse) deaths per year from diseases like chicken pox, scarlet fever,dyptheria, tetnus and pnuemonia to a couple a year. Not including the even higer number of children that don't become mentally or physically debilitated because of the diseases and can grow up and be productive members of society.

    Government does not make an immediate profit like MacDonalds true. But to say it doesn't do anything profitable is to be willfully ignorant of all that it has done.

  10. @sam and others. That is such liberal BS its funny. Way before government the private companies were building dams, roads, railroads, canals etc. They built schools, hospitals and whole towns.

    The government takes money through taxes and builds a road. Big deal. I can name many roads and railroads taht companies built because they had a need. And study after study showsd government building programs are way more expensive than private. What you don't get are bridges to nowhere or 12 lane highways when 4 are more than enough.

    And recently San Fancisco was collecting taxes to build a bridge. Only problem is the bridge was being built in CHINA! So much for you local profit theory.

    Governments have been the cause of millions of deaths of people throughtout history. Governments have usually been a supression on freedoms. The more power or maney a government has the less freedom its citizens have. History shows this to be true a thousand times over.

    A little over a month ago two projects started about the same time. One was on private property (a manufacturing plant) and the other public. They were related and almost identical. The one paid for by the private comany was done in less than a week. the public job took a month to finish.

    1. Lookup railway standardization at the federal level for the continental US. Similarly the Gauge Act in Britain.

  11. "Goverments have been the cause of millions of deaths throughout history". Great so have asteriods, cars,disease, natural disaster but what the hell does that have to do with government doing what it does?

    I could make the same argument in reverse that governments have saved millions of lives over the course of human history and it would be equally pointless in this conversation.

    Government does things that are inherently "non-profitable" in the short term. Building roads, educating children, providing security etc. Businesses do what is profitable in the short term. Expecting Business to govern is as stupid as expecting Government to be a business. Niether is equipped to do the others job.

    Business operating without government oversight brings things like our lovely stock market crash, and government without regulation gives us the lovely Transportation and Security Administration that can do whatever it wants whenever it wants just because it can.
    Because people run them both and people need other people to keep them honest.

  12. @Sam, may I suggest you go read Jefferson, Madison and some others about the dangers of government.

    An asteroid is not something we vote to happen. Governments are placedd there by simple minded people thinking they will be better off. Just ask germans how that feeling was.

    And if you think building a road is non-profitable I suggest you read about the Roman Empire and their roads. Roads throughout history have been built FOR profit purposes.

    And I never said government was useless or that there should be no government. There should only be a very limited government and government is not the best approach to solving problems.

    Take hover Dam that libs love to mention as a shining example of how great government projects are. Only two problems. First off the greenies would never allow it to be built today. Second, it was built using private construction. Government hired private firms to build it.

    Here is what government is good at. Defense, basic research and setting up limited laws to keep order and allow the easy exchange of capital and goods in an open and free society. Capitalism works simply because its individuals with the freedom to risk and earn rewards that make it work. Governments end up with things like bailouts.

  13. @Goodmongo: You bringing up the example of the Roman Empire is amusing not just because it's hopelessly anachronistic but because Imperial Rome was a gigantic welfare state. The state was expected to take care of the citizen.

    The whole mantra of public sector inefficiency and public efficiency has been repeated by conservatives enough to have become axiomatic, but it really isn't necessarily so. Government agencies operate under constraints external to the raw profit motive. A private postal service would not guarantee deliveries to Middle Of Nowhere, Alaska at the same price and speed as to the town down the road. A private health care system would not even insure a lot of the seniors covered under Medicare, let alone do it as efficiently as that programme. And that's just American examples, without getting into things like the British NHS, Canadian national rail companies, various water utilities around the world. Moreover, as you yourself observe, it is not so easy anymore to dissect the sectors. Many government programmes would not succeed without relying on private companies, and many private firms live or die by government contracts.

    Besides, as Sam points out, there is no profit motive in humanitarian aid, environmental conservation, libraries or welfare, nor should there be. Government programmes, though I dislike the very idea of putting a price on basic human dignity, maintain social order, safety and a civilised society which makes it possible for private enterprise to operate.

    The romance of the ruggedly individualistic entrepreneur is in many ways a thing of the past. I would like to know what exactly is being risked by a finance executive sloshing money (wrapped up in arcane investment vehicles to the point of nonsense) from one virtual market to another. If he's inept at his computer games and runs his firm into the ground, he will receive a golden parachute anyway. Hell, I am sure there are a good number of people out there who got very wealthy off shorting Greek sovereign debt. And you wonder why the working class is mad.

  14. @goodmongo. If you are going to quote Madison and Jefferson then I assume you have actually read them and understand they felt that no government was worse than big government, and that the best course was a balance between individual rights and government power. Or you can just go to the Source and read John Locke the man who influenced them the most, also known as the father of liberalism.

    That's part of the problem in the US with political discourse these days. I didn't disagree with you. In fact I agree the government has overspent and is on a very bad course. But because I pointed out the uncomfortable fact that many good things have been done by government that would never have happened if we left it up to business to get done, you felt the need to argue a point that wasn't made.

    I said roads, vaccinations, and many other things aren't profitable in the "short term". Businesses operate in a short term cash flow environment. It's why we can't get pharmaceutical companies to invest in new antibiotics, they'd rather come up with the next Viagra, or a long term treatment for Diabetes instead of a cure. Places like that is where government is needed.

    It's like arguing about whether or not we should pay for educations. That's a false choice. We pay to educate the children, or we pay the price for their welfare and incarceration. That's the real world choice.

    Most in the US keep arguing the reality we would like to be in instead of the reality we are in.

  15. @soresu & sam. Let me ask two very simple questions. If there were no private industry or private property where would the tax dollars come from?

    What percentage of private to public spending do you think is realistic and sustainable?

    As a sort of bonus question isn't 100% government bascially the definition of communism? But the first two are more important.

    1. The third question is useless, Goodmongo. You can "argue" better than that.

      The second one: It depends. If the government taxed everybody 100% and then redistributed the money in a way that everybody gets as much back as the guy just below him payed, the government would tax 100% and redistribute 100% and still, nothing much would have changed compared to no government.

      On the other hand, if the government taxed everybody 10% and then used the money to pay people to dig holes and then fill them up again, the taxes would be too high: 10% too high.

      What tax rate is too high depends on what the government does with the money and how efficient/honest it is.

      The first one: Tim Harford answered that in his funny way some time ago.

    2. Funny you chastise me for my third question but the article you link states that 100% public sector is communism.

      What the article and others ignore is the assumption tha tpublic sector is as efficient as the private sector. That is like saying a complete monopoly is as efficient as an industry with lots of competition. Facts simple don't support it.

      And if you pay public sector more money of benefits then where is the incentive for people to work harder, pay more taxes and get paid less in the private sector. Without a private sector to finance the public it won't work.

      This is the exact same thing you see in companies between cost centers and revenue centers. Yes they need accounting (cost center) but they force it to be very productive and cut costs there first in times of need. Sales (revenues) are last to be cut because without sales/revenues there is no money to fund the cost centers. And this is how it should be applied to private/public.

    3. I'm not saying that the public sector is as effective as the public one. It depends. The public sector is bad at business-like innovation, the private sector is bad at keeping the water clean.

      Unfortunately you are still arguing along the lines of the private sector paying for the public sector and this is a flawed way to look at it, as I tried to explain with my last post.

      Besides, you underestimate the potential for the public sector to be efficient. For example, the public sector can order private consultants to make parts of the public sector more efficient. They can be payed based on the saving over the next five years.

      And everything depends on what the government does with the money. That's why it's impossible to determine a perfect ratio. If the government uses the money to make people do useless stuff (waste) that's bad. If it give the money right back to the taxpayer nothing would change, even with 100% tax rate (the other extreme).

    4. Strictly speaking, Marxism foresees the withering away of the state. No need for government once we have done away with the class system and the people own the means of production. :)

  16. I think you are trying to come up with a question that is vague and without background has no real answer.

    The simple answer is if the government is focused and effective I think the tax rate is irrelevant. During the 50's the tax rate for rich people was 91%. through the 70's it was 50% and our economy purred all the way to the 70's when the energy crisis derailed it. We had the highest corporate tax rates in US history throughout that time.

    I have no desire to pay those taxes but it has been demonstrated that a well focused government can be successful with those rates. So the logical conclusion I draw from history is the US government was more effective and focused then than it is now. With more money bled from the citizenry and business the economy functioned better. And also in an environment where the government on multiple occasions voided companies copyrights and intellectual property and allowed other companies to use said intellectual property.

    Currently our tax rate is the lowest it has been in the last 60 years. Once you take all the deductions and tax credits individuals and corporations get.

    But our grandfathers had a more balanced commonsense approach to life. Baby Boomers have an all or nothing approach to everything.

    The problem is not the tax rate. The problem is the unfocused back and forth stupidity that happens when all politics is win or lose.

    For example the housing crisis. In the 60's LBJ (democrat)declared a war on poverty and the effect that had on loans was it became illegal to discriminate on the basis of color, or religion. In the 80's the Republicans decided that there was too much regulation and repealed some of the protections we put in place after the Great Depression, the democrats at the same time legislated that to prove they weren't discriminating banks had to prove they were giving a fair percentage of their loans to minorities, forcing some banks to make bad loans to meet those numbers. The banks that refused were prevented from doing things like merging with other banks. Then the Republicans repealed the legislation that prevented securities firms from offering bank mortgages. Then Democrats kept pushing Fannie and Freddie to give more loans. Then the republican all but repealed the protections from the Great Depression allowing business to make loans with virtually no oversight. Sub-prime mortgages became the norm. And for about 15 years everyone was happy. The Democrats were happy because more people had homes, the Republicans were happy because they had "proved" deregulation would grow the economy.then it all collapsed.

    The Republican followed their strategy of Deregulation while ignoring the Democrats. The Democrats followed their strategy of pushing a Home Ownership society ignoring what the Republicans were doing. Both could possibly have worked as a national policy alone, but together they created a perfect storm that caused our Current Great Recession.

    And virtually every major policy since the 1980's has been done the same way. It would be nice to blame, Taxes, or Democrats,or Republicans but the simple fact is the US government has been dysfunctional since the the 1970's and everyone knows that things are screwed up but they are too lazy to actually look back and study the history of how we got here. Thus we make no progress in fixing the root cause of our government. It is dysfunctional and tries to make laws that ignore reality and common sense.

  17. Way before government the private companies were building dams, roads, railroads, canals etc. They built schools, hospitals and whole towns.

    I don't even know what this means. "Before government?" Before civilizations?

    As I said before, either make the argument that governments provide zero value, or concede that they do (even if it's difficult to calculate).

    Private companies do a lot of good things, but the primary reason I am so pro-government is because corporations are not your friend. They don't care about you, you have no voice, and government is the only plausible bulwark against egregious harm. If it were profitable, a corporation would have a fiduciary obligation to its shareholders to undermine the stability of the United States. And there is zero objective reason to believe that obscene executive salaries are more efficient or profitable.

    Besides, would you really like to see everything privatized? Maybe Donald Trump will own all the paved streets in the North East? That would sure spur growth when suddenly you have to get permission from him to ship your goods on his roads. Or maybe he suddenly decides there's a $5 toll every 50 miles? His roads, his rules. Way better than government, amirite?

    1. And governments are your friend? Tell that to the citizens of Hitler's government. Or Stalins, Mao, Castro and hundreds more.

      Also why do you keep trying to get me to go 100% or 0%? I've said government is needed but should be very small and extremely limited in its scope.

      If it were profitable, a corporation would have a fiduciary obligation to its shareholders to undermine the stability of the United States.

      This is just silly and you can argue better than that.