Wednesday, December 8, 2010

Could government spending be profitable?

Economists speak of the multiplier effect of government actions in regard to taxes or spending. Recently I heard two claims on this, that a dollar spent circulates to a dollar and sixty cents of economic activity while a dollar of tax cuts circulates to a mere thirty cents. I doubt these are numbers that anyone will agree on, but there were two parts that stood out: first, that spending did a lot more than cutting taxes, second, that a dollar of spending creates more than a dollar of activity.

The second one made me think back to the cycling of money and what stops the cycle: taxes. By that I mean that the dollar is spent, some taxes taken out, the remainder spent, some taxes taken out, and so on. Eventually it will be whittled down to nothing, having returned entirely as taxes. This would seem to make spending neutral, as in theory it will always trigger that amount in increased taxes from economic activity. But there's another way for the money to stop moving: saving. At some point the entire dollar will be taxed or saved and it is the saving which prevents it from cycling fully around to balance the budget.

This suggests that the ideal way to stimulate an economy is to tax savings and then spend the revenues from those taxes.

On the profitable side, the newly flowing dollar and the resulting demand would encourage saved money to be invested, putting it into he flow as well, where it is taxed, and now the dollar of spending has freed up more than a dollar of incoming taxes. Profit! Also known as a surplus, the strangely forgotten opposite side of Keynesian economics.

Monday, December 6, 2010

Not so much fun on the other side, is it?

Military chaplains debate their role without 'don't ask, don't tell'

Among the issues raised by chaplains, according to the report, is whether a change in policy would hinder ministers' religious expression, particularly for those faiths that consider homosexuality immoral.

Friday, December 3, 2010

"So your answer is, it's the spending of money that drives the economy"

Representative John Shadegg of Arizona recently said this, to mock the interviewer (skip to the fourth mention of unemployment benefits). In other words, this seems to imply that this Congressman does not think that the spending of money drives the economy. I will admit that I have never been to Arizona or the Capitol (I'm excluding when I was approximately 1 year old) so maybe I don't know that they use a barter-based economy, or an economy based on mutual cooperation and sharing, which we might call Communism, but I'm pretty sure that in both places they use roughly the same money-based economy as the rest of the United States, and the world.

But maybe I'm being intentionally unfair and I should approach this more objectively. What would be an economy not based on the spending of money? We could have one based on the production of goods, but with no one to consume them, that makes little sense, so even a production-oriented approach eventually needs people to spend money. Besides, it would be rather hard to motivate workers to produce if they did not have any money to spend; slavery hasn't exactly withstood the test of time. Or we could try a research-based economy, driven by knowledge and technology and just generally getting better at everything we know and do. I like the sound of that. But I have to wonder, how do the scientists eat, live, and move? I imagine they require things like food, housing, transportation, perhaps even entertainment, so that beyond this Utopian knowledge-based economy there must also be an economy based on physical production, which goes back to the production-based economy which requires: spending money.

I get that some people are market fundamentalists and believe that any government intrusion in markets must be bad, and so obviously they'd want to reject Keynesian economics of government stimulus spending. But surely they still have some basic understanding of things like people needing money to buy goods to encourage production which is the root of employment. In other words, an economy based on spending money. Or alternatively, the Chicago school which would advocate deregulation and tax cuts, possibly with some trickle-down economics for good measure, which operates partly on the idea that the rich will... spend money!

See a theme here?

Yea, economies need people to spend money. When demand is low, you can cut taxes to encourage spending or you can raise government spending to raise spending. Or you can clap your hands and say "job job jobs!" and make it all better. Republicans like Mr. Shadegg seem to prefer the third approach.

But he's not done yet. The interviewer followed up with this question: "Unemployment checks, people don't spend that money?" To which he responded "No, they'll spend as little of it as possible because they'll hang onto it as long as they can." An excellent point, if it were true. In fact it's the complete opposite of the truth. The long-term unemployed tend to have bills, debts, and all manner of pushed-back expenses. In other words, they are going to spend that money. They have no other choice. Spending that money is what keeps their heat on, their bellies full (or at least half-full, but they might see it as half-empty), and themselves in their homes. So the Congressman is 180 degrees wrong on this. Earlier he said that any extension must also be linked to tax cuts. Why? Well surely it cannot be to hope for trickle-down spending, since the wealthy have a habit of saving their money. Does he want it for investment? In the long term, investment would make sense, but in the short term, who is going to invest in a business if there's no demand for products? Maybe there would be more demand if people were spending money...