Tag Archives: spending

The Long and Short of Fiscal Policy

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Sorry, I couldn’t resist.  That’s the title of another missive by Alan Blinder in a recent Wall Street Journal issue.

He begins with this Keynesian fiction:

In the short run—let’s say within a year or so—a larger deficit…boosts economic growth by increasing aggregate demand.  It’s pretty simple.  If the government spends more money without raising anyone’s taxes to pay the bills, that adds to total demand directly.

Umm, well, no, it doesn’t.  That increased government spending (accepting, arguendo, no associated increase in taxes) only comes at the expense of future taxes or current borrowing—which is more future taxes.  People aren’t as dumb as Keynes thought they were, or as Blinder thinks they are.  In the present case, Americans see this trap, and they reduce spending (and investing) today in favor of saving and/or paying down their own current debt, thus offsetting that spike (again assuming, arguendo, that a government actually can reduce spending after its spike up).

Moreover, that government spending crowds out a significant fraction of remaining private spending.  After all, why should we buy something that the government is going to buy and give to us?

On top of this, Swedish economists Andreas Bergh and Magnus Henrekson have a 2011 piece (login required; sorry), that surely Blinder has read, in the Journal of Economic Surveys that shows the deleterious effects of increases in government spending.  They conclude that a 10% increase in government size (relative to GDP) is associated with a 0.5%-1.0% lower annual growth rate in the economy.  This is no spike, but then governments don’t spike spending.

It really is pretty simple.  Just not as oversimplified as Blinder suggests, and not in the same direction.

In short, money that folks, and businesses, are paying in higher taxes is money that folks, and businesses, no longer have available for current spending.  Or investing, or saving.

It is true, though, that spending is increased relative to taxes.  But the only result of this “increase” is in the deleterious effects of deficit spending.

On this matter, Romer and Romer have a 2010 piece (login required here, too; sorry), that surely Blinder also has read, in American Economic Review, that shows the powerful effect of increasing tax rates on economic growth: an increase in taxes of 1% of GDP lowers GDP by nearly 3%.

Blinder has more in his piece, but with his underlying assumptions shown to be false, the rest has no more value than that.  For instance, he writes in all seriousness

But don’t we need to reduce the deficit—and by large amounts? Yes, we do, but that’s in the long run, where the effects of larger deficits are mostly harmful to economic growth.

Of course, as Blinder’s own Keynes noted so long ago, in the long run, we’re all dead.  More empirically, over the long run, governments do not unroll spending increases that they’ve foisted off on us for that good cause of the time.  As long as Blinder is satisfied that our present enormous debt can be safely reduced in that far-off fantastical long run, he’s satisfied that our present enormous debt never will be reduced.

Update: Deleted a section where I’d simply–and carelessly–misread Blinder’s statement, and so my argument became irrelevant.

Forms of Subsidy

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I’ve disparaged the concept of federal government subsidies in other writings, so I thought I’d take a post and identify some types of government subsidy to illustrate the range of handouts for which our pocketbooks are impressed.  Most of the forms below are Federal subsidies; although I do mention a few state-level subsidies, also.

One form of subsidy is direct money transfers.  These can take the forms of block grants to states, and they usually come with federal strings attached governing the use of the money, or the amount of money the states must put up in order to get the grant, or the state laws that must be enacted (vis., speed limits) in order for all of the grant to be delivered.

These transfers also often are based on the services being offered, as is the case with Federal Medicaid transfers, which depend on how many state citizens are eligible under the state’s rules.

Another direct transfer is unemployment insurance and food stamps.  In these programs, recipients have only to apply for the subsidy, and they begin receiving either money ( unemployment checks, for instance) or vouchers (food stamps are an example).

Another form of subsidy is preferential tax treatment for the favored group.  These can take the form of tax deductions or credits or exemptions from taxes.

Examples of tax credits include the Earned Income Tax Credit, tax credits to consumers for installing energy efficient items (e.g., geothermal heat pumps, residential-sized wind turbines, solar energy systems, and so on).  Other tax credits are aimed at the ethanol industry and renewable energy equipment manufacturers.

Tax deductions are available for oil and gas producers and for renewable energy producers and equipment manufacturers.  Other deductions exist for home (or business plant) mortgage interest, charitable contributions, age and disability on personal income taxes, and so on.

Individuals whose income is below a threshold are subsidized through being exempt from income taxes altogether.  The interest on some government borrowing (municipal bonds, for instance) can be exempt from taxes, and certain non-profit organizations are exempt from a variety of taxes.

Another form of subsidy is in the form of government loan guaranties, which enable the borrower to get loans at more favorable rates than they otherwise could.  These include, among others, student loan guarantees, home mortgage guarantees, and renewable energy company loan guarantees (recall Solyndra, et al.)

Another form of subsidy occurs through regulation.  A major example here is the protected monopoly status that utility companies and drug manufacturers get.  Such status protects the company from competitive pressures for a period of time (drug manufacturers and, not too distantly related, patent, copyright, license, and so on, holders) or for so long as government objectives are met (e.g., utility companies, who must comply with their (state) government rate requirements and criteria).

Other regulations are aimed explicitly at putting certain entities out of business.  The EPA’s clean air regulations aimed at coal-fired power plants are an example.

Another form of subsidy occurs through government mandates.  An example of these are mandates to buy (or sell) certain products (which can occur only at the expense of not having that money available to buy other products, even unrelated ones; or at the expense of not having that capital equipment or staff available to produce/sell other products, including unrelated ones).  The Patient Protection and Affordable Care Act’s Individual Mandate and the requirement to provide contraceptive services and abortifacients are illustrations.

Another type of mandate is a manufacturing one: producers must use fixed per centages of ethanol in gasoline manufactured for sale.  This mandate exists solely to create a market for ethanol that otherwise might not exist.

Another form of subsidy consists of government preferences.  These include preferential hiring requirements (military veterans, minorities, disabled, and so on) and preferential contract award requirements.  Preferential contracting includes preferences for minority-owned small businesses, and for small businesses, generally.

Another form of subsidy occurs primarily at the state level, particularly in those states that have union shop laws.  Such laws subsidize the unions either by requiring individuals to join a union as a condition of employment or by allowing the union to collect union dues from all employees in a company whether the employees are union members or not.  Such laws represent a large source of income for the unions in the form of dues they wouldn’t otherwise be able to collect.

Perhaps the most insidious subsidy is in the form of government-mandated affirmative action programs.  Such programs require the government to give greater weight to some citizens in its hiring (which weight can only come at the expense of other citizens trying to compete for the same job) and to give greater weight in its contracts to some entities—which again can come only at the expense of other entities bidding on the same contract.  Note that while these are closely related to the government preferences noted above, they differ in a critical way: affirmative action is based solely on race, gender, or ethnicity.

This is not an exhaustive list, either of type of subsidy or examples within each type presented, by any means, but you get the idea.  Nor have I offered any judgment concerning the legitimacy of any of the subsidies; that’s for another post.

“Tin Cups,” Is It?

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An AP article certainly makes one attitude plain.

In a piece otherwise about US efforts to get other nations to help pay for the costs of developing, training, and equipping an indigenous Afghan army, the AP’s anonymous writer says,

U.S. officials have had their tin cups out for months.  Marc Grossman, the top State Department official for Afghanistan, recently hit up European nations….

While there is an element of begging in the manner of President Obama’s entreaties to other nations that they honor their obligations; it’s hardly a matter of tin cup-holding to insist that those nations do, in fact, honor their obligations.

The writer also notes that

…someone has to pay for that army in an era of austerity budgets and defense cutbacks.

It’s true enough that times are tough for everyone.  They’re tough not only for the nations that have to be begged to honor their commitments, though; they’re also tough for the women and children—and men—of Afghanistan, and they’ll be especially so after the US, NATO, and other participating nations leave.

It’s also true enough, moreover, that these straits, while not the result of the original purpose of the US’ invasion of Afghanistan, have become obligations due to the mission creep in our involvement.

A lesson here, aside from the unseemly need to press NATO and others in the present involvement to satisfy their obligations—which shame is on those who must be pressed—is to not allow such coarse mission creep the next time.  And there will be a next time, since the terrorists don’t agree that the war is over, or there will be a new Dark Age descended.

Suicide by Spending

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Alexis Tsipras, head of the Coalition of the Radical Left—SYRIZA—has announced that if he becomes the next Greek Prime Minister after the June elections, he will demand that Europe expand funding for Greek spending under a new set of agreements, or he will repudiate all Greek debt, in the expectation that such a repudiation will collapse Europe’s economies.  Europe, demands Tsipras, must move to a more “growth oriented” policy vis-à-vis Greece.  But his idea of growth is simply growth in government and growth in government spending.

Of course, this is naked extortion, and it should make it impossible for any further talks between the EU and Greece to occur—and for any further money to be sent to Greece.

There was a scene (NSFW) in Blazing Saddles that comes to mind from this SYRIZA extortion attempt.  The EU shouldn’t fall for it.

Thoughts on Defense Spending

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Mark Gunzinger and Andre Krepinevich (with the Center for Strategic and Budgetary Assessments, a non-profit defense-oriented think tank), writing in The Wall Street Journal, warn of a reversal of events that contributed to the collapse of the Soviet Union—an arms race that they couldn’t afford and so couldn’t win.  This time, it’s Russia and the People’s Republic of China that are pursuing an arms race, this time of powerful, fast, accurate weapons that will bankrupt us countering, if we don’t change our weapons philosophy.

Russia and the PRC are actively developing high-energy lasers designed to shoot down incoming weapons, while we continue to rely on expensive—$10 million per shot—missiles and fighters—$150+ million—per to do the same mission.

Gunzinger and Krepinevich report on two types of lasers that we could field in six years, were the will extant to make the switch: solid state and chemical lasers.

Experts in the US Navy state that within six years, using technologies already developed and demonstrated in test firings, they could field solid-state lasers on warships with sufficient power to counter anti-ship cruise missiles, unmanned aircraft, and fast-attack “swarm” craft like those of Iran.  These lasers could reduce the need for warships to carry bulky—and expensive—defensive munitions, while freeing space for other weaponry.

On the matter of chemical lasers, they write

…new chemical lasers can generate much greater power outputs than their predecessors, enabling them to engage a wide range of air and missile threats, including long-range ballistic missiles. Also within six years…the Air Force and the Army could field ground-based, megawatt-class chemical lasers to help protect key bases in the Persian Gulf and Western Pacific.

And in the homeland.

But that’s just one set of game changing weapons.  Another weapon is the rail gun on which the Navy also is working.  Rail guns use electromagnetic energy rather than explosives—gun powder—to accelerate a projectile down their barrels.  As a result, such weapons can fire accurately a projectile much farther—out to 100 miles vs a current 13 miles—and the ships carrying them don’t need to commit limited shipboard space to that gunpowder, and so they don’t have to worry about all that explosive going off if the ship is hit in combat.