Government Spending is Panacea

[ShackledNation]

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.

 

[editec]

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.

 

[ShackledNation]

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.

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?

 

[Sundial]

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.

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.

 

[Sundial]

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.​

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.

 

[ShackledNation]

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.

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.

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.

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.

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.

 

[ShackledNation]

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.​

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.

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.

 

[Sundial]

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?

 

[ShackledNation]

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?

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?

 

[Toro]

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.

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.

 

[ShackledNation]

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.

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

Government will always crowd out the private sector. Every dollar the government spends on something is a dollar the private sector cannot spend or invest. Enjoy this cartoon:

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.

Please explain your reasoning behind the claim that higher monetary velocity is desirable.

From the equation of exchange, it seems that money together with velocity is the source of funding for economic activities. Furthermore, from the equation of exchange, it would appear that for a given stock of money, an increase in velocity helps finance a greater value of transactions than money could have done by itself.

As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why.

Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.

Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange. In other words, money fulfills here the role of the medium of exchange and not the means of payment.

The number of times money changed hands has no relevance whatsoever on the baker's capability to fund the purchase of potatoes. What matters here is that he possesses bread that can be exchanged by means of money for potatoes.

How is it that the fact that the same $10 bill used in several transactions can add anything to the means of funding? By what means does the speed of money circulation add to the real pool of funding? Imagine that money and velocity would have indeed been means of funding or means of payments. If this was so, then poverty worldwide could have been erased a long time ago.

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

People are not infallible in the market, and can make mistakes. However, the difference here is that if a private individual makes a mistake, he suffers losses, which signal a mistake has been made and force him to change or go out of business. Government, on the other hand, does not function on profit and loss. If it runs out of money, it just taxes more. I also disagree that government is more efficient at constructing roads and schools, but that is a bit off topic.

I will say this: You argued that it was impossible for the market to determine the future value of students, etc. You said because this is impossible, the market breaks down. What should have been blatantly clear it is impossible for government as well! And it is more feasibly possible for individual parents to judge the success of their own child than government can possibly judge the successes of every child.

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.

The growth of Sweden, Japan, and Korea is not due to government involvement. There are far more factors at play. Correlation does not prove causation, and that is why logical arguments are vital. Support of free markets is not dogmatic faith. History has proven that again and again. I am not an anarchist. But the reason I support government is not because I think government is better at providing us with certain goods. I support government as a necessary evil because without a legitimate power there is always the possibility that an illegitimate power will seize control and eradicate liberty. Sadly, our government has over the centuries done the same thing.

 

[Sundial]

You do not see the the jobs the unemployed would have had if the money were not taxed away.

The "taxed away" part is problematic. The government spends money as fast as (or faster than) it gets it.

We know there's a flow of money between the government and the private sector. We know the private sector doesn't have any less money because of the flow. We know the amount that goes in is the same as the amount that goes out. So why should the private sector hire fewer people?

Let me turn the hypothetical around a little bit. Suppose the government spends first, and then taxes. Suppose also that there are some unemployed people who are skilled and willing to work.

Your business has not been taxed, so it doesn't fire anybody. The government, on the other hand, hires a bunch of people who otherwise wouldn't have had jobs or incomes, and puts them to work building a bridge.

The net result is $10 million worth of wages that otherwise wouldn't have been there. Plus a bridge. The bridge workers don't just keep that money, though, they spend it. They buy food, shelter, clothing, all of those things. In fact, they buy it from your business, which now has an extra $10 million of income. At the end of the year the government taxes your business $10 million, then hires the bridge workers to build a road.

In this hypothetical, no one in the private sector is worse off. The business does not have to lay off any workers. The difference is we created a bunch of jobs, and we got a bridge out of it.

The problem is where you're beginning and ending your hypothetical.

If you built a hypothetical where the sun evaporated water off the ocean, and then it rained, and then the sun evaporated more water, (and ended your hypothetical there) you'd think eventually all the water in the ocean would evaporate into the air.

 

[ShackledNation]

You do not see the the jobs the unemployed would have had if the money were not taxed away.

The "taxed away" part is problematic. The government spends money as fast as (or faster than) it gets it.

We know there's a flow of money between the government and the private sector. We know the private sector doesn't have any less money because of the flow. We know the amount that goes in is the same as the amount that goes out. So why should the private sector hire fewer people?

Let me turn the hypothetical around a little bit. Suppose the government spends first, and then taxes. Suppose also that there are some unemployed people who are skilled and willing to work.

Your business has not been taxed, so it doesn't fire anybody. The government, on the other hand, hires a bunch of people who otherwise wouldn't have had jobs or incomes, and puts them to work building a bridge.

The net result is $10 million worth of wages that otherwise wouldn't have been there. Plus a bridge. The bridge workers don't just keep that money, though, they spend it. They buy food, shelter, clothing, all of those things. In fact, they buy it from your business, which now has an extra $10 million of income. At the end of the year the government taxes your business $10 million, then hires the bridge workers to build a road.

In this hypothetical, no one in the private sector is worse off. The business does not have to lay off any workers. The difference is we created a bunch of jobs, and we got a bridge out of it.

The problem is where you're beginning and ending your hypothetical.

If you built a hypothetical where the sun evaporated water off the ocean, and then it rained, and then the sun evaporated more water, (and ended your hypothetical there) you'd think eventually all the water in the ocean would evaporate into the air.

If I am correct, you had two main arguments in the above.

1. If you look at it from the perspective that government spends first and then taxes, it becomes clear there is growth.

2. Workers funded by government spend their money on other goods as well, creating more jobs and hiring from my business. Thus, government spending creates more than just the jobs created by the bridge.

I will address each separately.

1. It does not matter at all whether or not you look first at spending or at taxation. If you look at spending first, all of the affects of taxation will simply come in the future. You do not avoid taxation by borrowing, you only delay it. The situation does not change in the least. If you spend first and create the bridge, you must eventually tax to pay off the debts. The money taxed will be spent not on more jobs, but on the previous jobs. Your scenario would only be true if government did not have to pay back debt. If the spending is instead used not to pay off the debts but to create more jobs, you will continue accumulating debt, and the future tax burden will only grow.

2. You are absolutely correct. People who obtain money through government funds will then spend that money on other goods and services, creating employment with their demand. But again you miss that those who were taxed cannot spend that money on goods and services. They would not hoard their money either. Again, there is only a transfer of who does the spending.

To illustrate the point:
Government taxes 10 million from the private sector. It then spends that 10 million to create a bridge. It is evident that any jobs created by government to build the bridge were funded at the expense of private sector jobs that could have been created had the money not been taxed away. The same would be true if government spent first, the order of the affects would simply be reversed. (In fact, if government spent first, it could even be worse, because government would also have to tax interest.) Furthermore, this bridge was not really needed by anyone in the community, and was built for the sake of jobs only. The bridge is nice, and some people use it, but it is not truly necessary.

That is the initial transaction. Because government spent the money instead of the individuals who were taxed, there is no net gain in wealth. Perhaps the bridge would have been created by the private sector, perhaps for less money. But since people may not have needed the bridge, money would have been spent on other sectors of the economy, producing what people actually need.

You added that bridge workers spend their money, further stimulating growth. But had the jobs funded by the private sector been allowed to come into existence, those getting paid would do the same thing. The only difference between government spending the money and the private sector spending the money is that when government spends money, it is arbitrarily spent, and not in line with consumer preference. In the private sector, spent money is inline with consumer preference because it is consumers doing the spending.

Your claim that the bridge workers now have more money to spend is meaningless, because had government not taxed away the money, different jobs would have been created, and money from those jobs would have been spent in the same fashion. Again, at best you can argue it is a zero sum game, but in reality, because of government inefficiencies, there will always be a net loss. But the loss is widespread and unseen and the benefit concentrated and visible to the eye, so people focus only on the benefit and forget the cost entirely.

 

[Zander]

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.

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.

I'd be careful holding up Japan as a model of success.
Japan is on the verge of an economic collapse. Their debt to gdp ratio is 220% and projected to top 250% in a few years. They have been able to finance their debt because of the home bias and patriotism of their population who continue to buy Japanese Treasury bonds. But that is becoming increasingly more difficult as the population ages. Japan's saving rate has dropped from an enviable 18% in 1981 to below 4% today as the aging population withdraws their savings to live on. Their dependency rate is 100% - for every retiree there is only 1 worker.

At some point the Japanese will no longer be able to finance their budget deficit internally and will have to go to the world market by selling bonds. That or they will have to engage in massive Qualitative easing - the kind that will lead to hyperinflation. So the question is: Who wants to buy Japanese Treasury Bonds that pay 1%?

Japan is a fly looking for a windshield....

 

[Toro]

I'd be careful holding up Japan as a model of success.
Japan is on the verge of an economic collapse. Their debt to gdp ratio is 220% and projected to top 250% in a few years. They have been able to finance their debt because of the home bias and patriotism of their population who continue to buy Japanese Treasury bonds. But that is becoming increasingly more difficult as the population ages. Japan's saving rate has dropped from an enviable 18% in 1981 to below 4% today as the aging population withdraws their savings to live on. Their dependency rate is 100% - for every retiree there is only 1 worker.

At some point the Japanese will no longer be able to finance their budget deficit internally and will have to go to the world market by selling bonds. That or they will have to engage in massive Qualitative easing - the kind that will lead to hyperinflation. So the question is: Who wants to buy Japanese Treasury Bonds that pay 1%?

Japan is a fly looking for a windshield....

For certain. You are correct. But look at where they came from. They came from a defeated, dirt poor nation to the second largest economy in the world.

Japan is fracked, but don't downplay their achievements.

 

[Toro]

Government will always crowd out the private sector. Every dollar the government spends on something is a dollar the private sector cannot spend or invest.

Government is not crowding out private sector investment now. The private sector is hoarding cash. Interest rates are at knee-scraping lows. There is no demand. Capacity utilization is extremely low.

Please explain your reasoning behind the claim that higher monetary velocity is desirable.

Because velocity drops during a recession.

A constant V is key to the quantity theory of money. For Fisher, the assumption was a leap of faith since data on GDP and the money supply did not exist in 1911. However, looking at that data in Figure 1, page 542, we see very clearly that velocity is not constant, even in the short run. In particular, velocity drops significantly during recessions.

Chapter 21: The Demand for Money

From the equation of exchange, it seems that money together with velocity is the source of funding for economic activities. Furthermore, from the equation of exchange, it would appear that for a given stock of money, an increase in velocity helps finance a greater value of transactions than money could have done by itself.

As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why.

Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.

Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange. In other words, money fulfills here the role of the medium of exchange and not the means of payment.

The number of times money changed hands has no relevance whatsoever on the baker's capability to fund the purchase of potatoes. What matters here is that he possesses bread that can be exchanged by means of money for potatoes.

How is it that the fact that the same $10 bill used in several transactions can add anything to the means of funding? By what means does the speed of money circulation add to the real pool of funding? Imagine that money and velocity would have indeed been means of funding or means of payments. If this was so, then poverty worldwide could have been erased a long time ago.

I will let an economist explain it.

Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

In a second scenario Beverly says to Alice: "I have a house. Why don't you build a deck--I will pay you $500 after the work is done. Here is the contract." Alice takes the contract and goes to Carol. She shows the contract to Carol and says: "See. I will be good for the debt. Cook me meals so I will have the strength to build the deck--here's another contract in which I promise to pay you $500 within 90 days if you cook for me." Carol agrees.

Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

Alice then asks Beverly for payment. Beverly says: "Wait a minute." She goes to Carol and says: "Here is the the $500 cash I owe you." Beverly pays the money to Carol. Beverly then says: "But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?" Carol says: "Sure." Beverly files an amended deed showing Carol's mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

The net result? (a) Alice who would otherwise have been idle has been employed--has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed--has traded her labor for a secured lien on Beverly's house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

Alice has more income and consumption expenditure than if she hadn't taken Beverly's job offer. Carol has more income and saving than if she hadn't cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department)

People are not infallible in the market, and can make mistakes. However, the difference here is that if a private individual makes a mistake, he suffers losses, which signal a mistake has been made and force him to change or go out of business. Government, on the other hand, does not function on profit and loss. If it runs out of money, it just taxes more. I also disagree that government is more efficient at constructing roads and schools, but that is a bit off topic.

I don't disagree that governments are less efficient than markets. What I am arguing is that governments are not always less efficient than markets.

I will say this: You argued that it was impossible for the market to determine the future value of students, etc. You said because this is impossible, the market breaks down. What should have been blatantly clear it is impossible for government as well! And it is more feasibly possible for individual parents to judge the success of their own child than government can possibly judge the successes of every child.

The government is not trying to forecast the discounted cash flow of every child's potential earnings power. Instead, it is funding all children because it is impossible to know who will do what in the future. That's market failure.

The growth of Sweden, Japan, and Korea is not due to government involvement. There are far more factors at play. Correlation does not prove causation, and that is why logical arguments are vital. Support of free markets is not dogmatic faith. History has proven that again and again. I am not an anarchist. But the reason I support government is not because I think government is better at providing us with certain goods. I support government as a necessary evil because without a legitimate power there is always the possibility that an illegitimate power will seize control and eradicate liberty. Sadly, our government has over the centuries done the same thing.

Of course these countries have grown wealthy because of government involvement. It is central to their model. I do agree that the market is the primary driver of wealth creation. No argument from me on that one. What I am arguing is that the market is not always the only driver. Generally, the market knows best. But sometimes, the market breaks down because of human behavior. Dogmatic free market theoreticians argue that people always act rationally. But anyone who has ever had dealings with, you know, people, know that people don't always act rationally.

 

[Big Fitz]

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.

And the one point of Keynsian economics that Liberals deliberately ignore is that taxes are raised in good times, and LOWERED in bad.

Of course, Keynesian economics has shown for 80 years it's a failure. But what the hell are they going to care as long as they remain the masters? Anything for their power and political religion.

 

[ShackledNation]

Government will always crowd out the private sector. Every dollar the government spends on something is a dollar the private sector cannot spend or invest.

Government is not crowding out private sector investment now. The private sector is hoarding cash. Interest rates are at knee-scraping lows. There is no demand. Capacity utilization is extremely low.

Whenever government spends money, it does so at the expense of the private sector. If the free market is not spending or investing, it is because there is uncertainty. During a recession, malinvestments are revealed, and it takes time for the proper use of resources in line with actual time preferences and consumer demand to get where they need to go. You seem to be insinuating the theory of idle resources, that government is hoarding resources that should be put to use, and government must put them to use. That theory is completely false. Resources are idle for a reason. And there is no demand? Really? Demand for what? Demand for housing has dropped because the bubble popped. It should never have been so high anyway. Exactly what is not being demanded that should be demanded? Demand is fine. Consumer goods were affected the least by the recession. Capital-intensive goods like construction were the hardest hit. This is not about a drop in aggregate demand. This is about a recession needed to correct malinvestment. The more you try to stop it, the longer the market will take to correct. The reason there is a recession is because interest rates were held artificially low.

Because velocity drops during a recession.

That does not answer my question of why higher monetary velocity is desirable. In fact, it completely ignores the question altogether.

I don't disagree that governments are less efficient than markets. What I am arguing is that governments are not always less efficient than markets.
I get it. It is the same old theory of idle resources that need to be stimulated. But that is false. Take it from a professional economist.
http://mises.org/books/theory_of_idle_resources_hutt.pdf
William Hutt. Ever heard of him?

The government is not trying to forecast the discounted cash flow of every child's potential earnings power. Instead, it is funding all children because it is impossible to know who will do what in the future. That's market failure.

Can you explain why it is private schools that outperform public schools if education in the free market is a failure? It is not necessary to know what a child will be in the future to teach the child basic elementary skills. Doctors and lawyers both know basic math, English, and writing skills. And funding all children does not solve your stated problem (which I don't believe is a problem at all). In fact, when was education even supposed to be about funding kids who would have high potential earnings? Pre-college education is about teach students basic skills and has nothing to do with "potential earnings power."

Of course these countries have grown wealthy because of government involvement. It is central to their model. I do agree that the market is the primary driver of wealth creation. No argument from me on that one. What I am arguing is that the market is not always the only driver. Generally, the market knows best. But sometimes, the market breaks down because of human behavior. Dogmatic free market theoreticians argue that people always act rationally. But anyone who has ever had dealings with, you know, people, know that people don't always act rationally.

You have been brainwashed. There is so much wrong with the above there I simply do not have the time to give you a post detailing the errors. I will take Sweden as a simple example. Here is a great article.
The Sweden Myth - Stefan Karlsson - Mises Daily

There are so many other factors besides the size of those country's government. To find out which factors cause growth and which do not, you have to use logic and reason. There is nothing logical to assume government will provide better conditions than the free market. The best argument is the theory of idle resources by Keynes, and it is patently false. I will detail why later if you need me to.

Human behavior through coercive government will do much more damage than it would through free and voluntary exchange. People do always act rationally at least in their mind. People may make stupid decisions, but in their own mind they are making the right choice and are doing what they think will benefit them the most. They may be wrong, and regret it later, but that is simply the truth. The only people who do not act rationally are literally insane.

Do not confuse rationality with infallibility.

 

[Toro]

Only posting from mises.org is no different than only posting from Marxism.org. It's tough to take seriously. Especially when the person who has only posts from mises.org is accusing others of being "brainwashed." Austrians and Marxists are two sides of the same coin.

Of course other factors have played a roll in Sweden's rise. But that's not the point. Other factors besides "freedom" play a role in the creation of economic wealth. The primary driver of wealth creation is the market. But it is not the only driver.

As for education, you miss the big point. It's not an issue between public and private schools within a publicly funded system. It's what occurs when there is no public funding at all. And what happens is that a wide swath of individuals do not get educated, which lowers the overall human capital of a society. Developmental economists know how important public education is. ALL economic growth is a function of technological advancement, and technological advancement is a function of education. Having a dumber population hinders economic growth.

As for monetary velocity, MV=PY=GDP. ~ MV=GDP. When V falls, so does GDP. When V rises, so does GDP. When there are output gaps in the economy, an acceleration in V can increase real GDP. In English, if everyone stops transacting, GDP collapses.

 

[ShackledNation]

Only posting from mises.org is no different than only posting from Marxism.org. It's tough to take seriously. Especially when the person who has only posts from mises.org is accusing others of being "brainwashed." Austrians and Marxists are two sides of the same coin.

Toro, the link I posed was a link to a PDF book written by someone who was alive before mises.org existed, and was not at all affiliated with the Austrian school. The site simply hosts pdf versions of many books by various free market economists. And when I do quote the site, I am primarily linking to expansion of analysis if you are interested, or links to the data I used so as you know I am not pulling it out of my ass. Your argument is circumstantial ad hominem, attacking the source rather than what it says. People do it all the time. If you quoted Marxist.org, I could not dismiss the reasoning because of the source. If you can prove that the source used poor reasoning, or that the data is collected incorrectly or dishonestly, then that is of course is completely valid. But saying "that is from mises.org or marxist.org or keynes.org, so I will not address it" is a logical fallacy, and no argument at all.

Of course other factors have played a roll in Sweden's rise. But that's not the point. Other factors besides "freedom" play a role in the creation of economic wealth. The primary driver of wealth creation is the market. But it is not the only driver.

The primary distorter of the market is government. Government can influence what is produced, but because it obtains funds not by voluntary exchange but coercision, it will always be a transfer of wealth, producing one thing over another, and not the creation of wealth itself. That is the point I keep trying to explain. The bridge is created and bridge workers are given jobs not in addition to jobs in the economy, but at the expense of other jobs that never came into existence because the money to fund them was expropriated. Government of course can drive the direction of production. But it cannot sustainably increase production at all. I am not saying government cannot cause some people to be better off than they otherwise would have been. Doing so would be false. But what you must also realize is that by making some people better off, it makes others worse off. The best you can say is there is no net change, in other words a zero sum game. But as Hazlitt noted, government stimulus gives us unbalanced production, misdirected production, production of the wrong things...all of which lead inexorably to unemployment and mal-employment.

One cannot create wealth by printing more money or by borrowing and spending funds which can never be repaid. The source of unemployment is some disturbance in the price and profit system. Government cannot possibly help matters by intervening in ways which further distort and disturb that system.

As for education, you miss the big point. It's not an issue between public and private schools within a publicly funded system. It's what occurs when there is no public funding at all. And what happens is that a wide swath of individuals do not get educated, which lowers the overall human capital of a society. Developmental economists know how important public education is. ALL economic growth is a function of technological advancement, and technological advancement is a function of education. Having a dumber population hinders economic growth.

Ok, I did miss your point. I thought you were trying to say public schools provided by government are better than private schools provided by the free market. Human capital is, of course, incredibly important. I agree completely with everything you said except the portion bolded.

Public education in the US (in most cases) is quite terrible. If the education system of public education fails to educate successfully, it will not increase human capital. People will not be better off and more educated, but resources will be wasted. It has to do with quality vs. quantity. If everybody receives and education, but that education is very poor, society will not benefit.

Now of course it is possible for public school to be successful at educating. New Hampshire, so I hear at least, has very decent public schools. It is also possible for their to be private schools that perform terribly. However, unless subsidized by government, these schools will have to change their policy or go out of business, freeing up resources to be put to use to educate more successfully. Bad public schools, on the otherhand, get more money thrown at them (which is the opposite of profit and loss--the worse government programs fare, the more money they get).

This is evident in nearly all studies. Public schools spend twice as much money per student as private schools, but are less successful at educating students.
http://www.mackinac.org/archives/1997/s1997-04.pdf

Private schools often offer financial aid to needy students, and private charity often tries to set up free schooling for underprivileged children if there is a serious need. They do this in Africa and around the developing world, and could do the same here too. You are too quick to come to the conclusion that if public education were stopped, we would have a population of idiots. Again, I suggest a short article on your favorite site that has some interesting analysis you may or may not find interesting.
What If Public Schools Were Abolished? - Llewellyn H. Rockwell Jr. - Mises Daily

Just like any other market, competition would ultimately drive down the costs of schooling so the vast majority could afford education, and the few that could not would likely be helped by private charities and churches, which has been the historic precedent prior to public education. Do not underestimate civil society. You have demonstrated you care about poor children getting educated. So do I, and so do many others. Forcing people to pay for an inefficient system is not helping needy children. Voluntarily contributing money to programs, still allowing for the system of profit and losses, will help them. People will donate to programs they believe are best at helping the children. The market can offer free services as well, but it is done out of altruism rather than the coercive means of government.

As for monetary velocity, MV=PY=GDP. ~ MV=GDP. When V falls, so does GDP. When V rises, so does GDP. When there are output gaps in the economy, an acceleration in V can increase real GDP. In English, if everyone stops transacting, GDP collapses.

How does GDP enter that formula? I have heard it used for inflation, but not GDP, and if it is GDP I suspect it is nominal GDP. Nominal GDP is largely useless for measuring economic growth, for all it really measures is inflation.

MV=PY is a formula that states money times velocity of money=price level times output (according to GDP). If you hold the price level and money supply constant, and velocity increases, output will increase according to the formula. As I said earlier, this makes little sense, for people could become infinitely rich with huge economic growth if they simply spent money in cycles without producing anything new. For example, say I sell someone a TV for $1,000. The TV is then bought by someone else for $1,000. The same TV is sold and bought millions of times, meaning monetary velocity is high. But there is still only 1 TV. Also, the formula suggests Money Supply=Output, and that by simply printing more money the economy will grow. This is ludicrous. All this will result in is inflation, not wealth.

I could easily come up with a formula that says FM-G=RW. FM is free market policy, G is government policy, and RW is real wealth.What if people are spending their money on unsustainable projects? Like in housing? Money was moving very fast in the wrong direction. Keynes failed to understand quality and looked only at quantity. Thus his equation-based aggregate approach. But in economics, quality matters. And quality cannot be put into an equation, calculated, or aggregated. Keynes fails to understand this fundamental economic reality, and once this is realized his entire theory collapses. Monetarists make the same mistake. Not all spending is beneficial to a productive economy. The logic behind the formula is bad and fallacious, making the entire formula irrelevant unless the logic can be defended. The formula MV=PY also equation does not take into consideration inflation of some goods relative others; namely, capital-goods relative to consumer-goods.