Government Spending is Panacea

Discussion in 'Economy' started by ShackledNation, Aug 7, 2011.

  1. ShackledNation
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    ShackledNation Libertarian

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    Panacea, so goes Greek mythology, was the goddess of healing. She had the power to cure all diseases and prolong life indefinitely with a potion she created. Anyone who had it would have the elixir of life and immortality. All ills would vanish forever.

    Today and ever since the Great Depression, economists have believed that the economic equivalent of Panacea's potion is government spending. It will cure all ills, save the free market, and bring infinite prosperity. If only such a story were not as false as the myth of Panacea.

    Keynesian economists constantly demand that government spend more money to pull us out of recession. When such policies fail miserably, and their predictions of recovery are revealed to be utterly false, the answer is never more than "it must not have been enough" or the more clever but equally inaccurate "government spending is needed to stimulate idle resources." (it only takes one question to realize such an answer is a poor economic argument: Why are resources idle, and should they be forced back into usage? The answer is 1) because resources were misallocated into sectors out of line with consumer preference, thus were generating losses and 2) no, for doing so will force hasty descision making and only misallocate resources again.)

    Jobs created by the public sector can only displace or even destroy private sector jobs. How can this be? Because if people are taxed $10 million to fund some government project--be it roads, bridges, or ice rinks--they now have $10 million less to spend on things they need, and that dropoff in spending will cost other people their jobs.

    Imagine a bridge project embarked by Congress trying to create jobs to stimulate the economy. We can see the bridge being built, and we can see the people doing the building. But there are other things we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken away by the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workings, farmers. The existence of the bridge is usually enough to win the argument because it is far easier to point to the bridge and convince all those who cannot see beyond the immediate range of their physical eyes.

    But all this is even granting government that it will merely divert jobs in a zero-sum game fashion. This is not correct. Bureaucrats have to be paid. Signs are constructed on freeways, costing hundreds each, so people focus only on the seen and forget the unseen. In the private sector, resources must be employed in line with consumer preferences if entrepreneurs wish to see a profit. If they do not employ resources in such a manner, they make losses and must either change their business plans or see their capital slip out of their hands. Government, on the other hand, lacks this crucial feedback mechanism, since it earns its money not by satisfying consumers but by the coercive means of taxation. Without having to pass the profit and loss test, it can never know how efficient or destructive its projects are. How much of something is needed? Where should it go? What materials should be used? Operating outside the realm of voluntary human relations and answering to no profit-and-loss test to guide them in resource allocation, government is inherently unable to answer these and countless other questions.

    Government spending, far from being the elixir of life, is really the angel of death. Like Panacea, its power is no more than a myth.
     
    Last edited: Aug 7, 2011
  2. editec
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    editec Mr. Forgot-it-All

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    The Keynesian theory is the theory of priming the economic pump.

    You know, much as the right has an economic theory callede "trickle down" economics?

    ACtually I believe that both theories have merit depending on the economic circumstance.

    When the supply side needs cash then supply side economic policies work.

    When the demand side needs cash then Keynesian responses work.

    Obviously when either response is needed, the response has to be large enough to have an effect.

    If, in either case, the response is feeble, the outcome will not be successful.
     
  3. ShackledNation
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    ShackledNation Libertarian

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    Neither theories are really correct. Supply side is only correct in that higher taxes may decrease tax revenue. But the purpose of taxation should not be to maximize revenue. The Austrian free market theory is correct.

    I think I explained why the theory of government spending to create growth is false. It will always be at the expense of private spending. Did you get that point?
     
  4. Sundial
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    Sundial Class Warrior

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    If people are taxed $10 million to fund some government project, they will have exactly the same amount of money after they build the bridge as they did before. There is no difference other than the bridge.

    Spending money does not cause it to disappear; it only means it changes hands.

    If you didn't understand this, you wouldn't understand economics.
     
  5. Sundial
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    Sundial Class Warrior

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    Building a bridge would never "destroy jobs". At most it would cause a worker to quit a job he had in favor of working on the bridge. But that's not destroying a job. It's a worker changing from one job to another.

    More likely, it would cause an unemployed person to obtain a job he otherwise wouldn't have had.
     
  6. ShackledNation
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    ShackledNation Libertarian

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    You are only looking at what is seen and not what is unseen. There is a new bridge that cost 10 million dollars at the expense of other projects and employment worth 10 million dollars. And because government is inefficient and also has to pay bureaucrats that produce nothing, there is a net loss in real wealth.

    I never said spending money causes it to disappear. Money is not disappearing, wealth is. What you fail to understand is that not all spending is equally productive, and the hands of government are far less efficient than the hands of individuals functioning under profit and loss. Read the last paragraph. At best money simply changes hands and the end result is the same. But that is not all that happens. Money spent by government tends to be wasted, for government is not held to the profit and loss test. The larger point was government spending cannot grow the economy. As you say, the money has simply changed hands. It boils down to what hands are more productive: government or the free market. The answer is the free market.
     
    Last edited: Aug 7, 2011
  7. ShackledNation
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    ShackledNation Libertarian

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    You are forgetting the worker that is not currently employed but would have been employed with the 10 trillion that was taxed away. At best, the unemployed person is obtaining a job provided by government instead of one provided by the private sector. As I said, there are bridge workers at the expense of other workers. There is not addition. At best, it will be a zero sum game. In reality, it will be worse, for due to government waste and inefficiency the result will be less sustainable production than there otherwise would have been.

    I am not talking about workers quitting currently existing jobs. I am talking about certain jobs never coming into existence. Jobs are destroyed not by people quitting them, but precisely because they were never permitted to come into existence.

    You see the unemployed finding jobs to build the bridge. You see the bridge. You do not see the the jobs the unemployed would have had if the money were not taxed away. You do not see all the goods and services that were never allowed to come into existence. And because of this, you buy into the false illusion that government spending works.

    Here is a simple situation. A business is taxed 10 million dollars. That business, had it not been taxed, would have expanded its production based on consumer preference and created 10 thousand jobs. However, because it was taxed, those 10,000 jobs never come into existence. They are destroyed. Government then spends that money not only on creating more jobs, but on paying unproductive bureaucrats, fighting wars, and other wasteful spending. Even if you argue government is just as productive as the private sector, and there is no net loss of jobs. But there would still be a net loss of production, for the free market system of profit and loss better judges consumer preference than government. There is no guarantee people will actually want what government produces. Bridge to nowhere projects are perfect examples. If what is produced is useless, there is an enormous loss of resources.
     
    Last edited: Aug 7, 2011
  8. Sundial
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    You said, they have $10 million now less to spend on things they need.

    But they don't have ten million less. They have the same amount as they did before.

    There is no reason - is there? - why people can't build a bridge and still buy all the things they need.

    I mean, unless they run out of workers. Or materials.

    Other than that, why should building one thing prevent something else from being built?
     
  9. ShackledNation
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    ShackledNation Libertarian

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    Sundial, if I have $50,000 and I am taxed 20%, I now have $40,000. How do you reason that I still have the same amount of money as before?
     
    Last edited: Aug 7, 2011
  10. Toro
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    Toro Diamond Member

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    This is true when government is crowding out private investment. It is not true when there is no crowding out.

    The above also assumes that monetary velocity is a constant. Sometimes, it is not. Sometimes, velocity collapses. When that happens, government spending can accelerate velocity.

    This also assumes that the market can everywhere and always price risk and reward correctly. Most of the time it can. Sometimes it cannot. This is why government almost universally funds the expansion and construction of roads and schools. The market is especially bad at pricing elementary schooling. In a true efficient market, individuals would be able to forecast the expected earnings of their 4 year-old throughout their lifetime, discount that cost back to the future, then pay up to that amount for elementary school. Given that this is impossible, the market breaks down and fails, and

    The market creates the most wealth for the most people, most of the time. It does not create all the wealth for all the people, all of the time. There is no question that the market is the most efficient allocator of resources. But to take it as dogmatic faith that the market is everywhere and always the most efficient every single time belies the success of countries such as Sweden, Japan and Korea which have grown very wealthy with heavy government involvement in their economies, not to mention the successes within America.
     

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