Government Spending: Better Than No Spending

July 21st, 2011 at 7:39 am David Frum | 38 Comments |

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In my column for The Week, I write about how even wasteful government spending is better then no spending at all:

Government spending is often wasteful. But it’s still spending.

When the Department of Waste, Fraud & Abuse buys toothpicks for the office cafeteria, that money is received by somebody. The recipient then buys other goods and services, circulating money through the economy. The money may not flow to its highest and best use, but it still flows.

What happens when the government money stops flowing?

If the economy is growing normally, then the ex-government money can be returned to the taxpayers who will spend it on something else, probably something more useful.

But what if the economy is not growing normally?

President Obama’s 2012 budget, submitted in February of this year, proposed $33 billion in cuts from federal agencies as part of an overall five-year freeze in non-defense discretionary spending.

Since then, the scale of proposed cuts has grown bigger and bigger and bigger. These cuts may not ever materialize. But if they did — you know, that’s real money they’re talking about. If the government were to spend less at a time when households and businesses still hesitate to spend more, well then … you don’t have to be an Orthodox Keynesian to recognize that less money would be spent.

And spending less money has real-world consequences for real-world suppliers and vendors.

So here’s the question:

If government is to cease providing extra demand to the U.S. economy sometime after, say, August 2 of this year, who will provide that demand instead? And how?

Click here to read the full column.

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38 Comments so far ↓

  • TerryF98

    Why are you still a Republican? You are 180 degrees away from the Tea bagging GOP right now.

  • superdestroyer

    Increasing government spending makes liberals more powerful and takes away power from conservatives. Increased government spending creates special interest groups who work hard to keep the spending going even during an economic boom. Government spending creates special interst who hand out the money and who receive the money. Also, government spending decouples too many people from the local economy. If most people in a city, county, or state are living on government funding, they become anti-growth, anti-development, and are the worst sort of NIMBY.

    • hlsmlane

      You may be right, except for one thing. We have a massive unemployment, and that is the underlying problem. We actually need to increase spending temporarily to address this. Plus, we could actually improve our infrastructure (a la the interstate highway system) to facilitate future economic growth.

    • clifford

      “Increasing government spending makes liberals more powerful and takes away power from conservatives. ”

      Sorry superdestroyer, but this is nonsense. Consider Lockheed Martin, Bechtel, Haliburton and the pharmaceutical companies. Not all increases in government spending are carried out by liberals. And by the same token, not all government spending is bad.

      • arturo

        “Not all increases in government spending are carried out by liberals. And by the same token, not all government spending is bad.”

        And the key variable is the deficit, which is a function of both spending and revenue, ie, tax cuts can play a role too.

        We ought to be fighting over the right mix of those, rather than the straw boogey men of deficits and debt that the Rubinistas and Reinhart-Rogoff have created for us.

  • Stewardship

    Deficit spending pushes an artificial bubble in the economy, just like Fannie and Freddie’s no-standards mortgage programs did in the housing sector. With growing deficits, our government continues to further inflate that bubble. It’s going to take a maestro to orchestrate a soft landing if we meaningful budget cuts hit the floor.

    It’s government spending beyond the point of equilibrium–where spending matches revenue–that cannot be replaced by a private sector living within its own means. For decades, economists agreed that deficit spending must be permitted to allow the federal government to help smooth out economic dips. Unfortunately, rather than pull that arrow out of the quiver once a decade, it’s the only arrow our government shoots now.

    • sweatyb

      just like Fannie and Freddie’s no-standards mortgage programs did in the housing sector

      sigh, you clearly have no understanding of what caused the housing bubble and Fannie and Freddie’s role in it.

    • arturo

      “It’s government spending beyond the point of equilibrium–where spending matches revenue”

      Huh? That’s a surefire recipe for disequilibrium. Look up the episodes where the USG ran a balanced budget or surplus for any meaningful period of time. How soon after did a recession or depression begin?

      “–that cannot be replaced by a private sector living within its own means.”

      The federal govt’s deficits are the *source* of the private sector’s (and state and local govts’) *means*. Unless money still comes out of the ground somewhere.

      “For decades, economists agreed that deficit spending must be permitted to allow the federal government to help smooth out economic dips.”

      Yeah, that’s an old gold standard relic. Incredibly, almost no one seems to have caught on to the fact that we haven’t been on a gold standard for a very long time. With a fiat standard, the money issuing govt must run deficits under almost any conditions imaginable for the economy to run smoothly.

      • beowulf

        I need to stop agreeing with you. :o )

        As the great Wynne Godley noted, “the budget balance is equal to the difference between the government’s receipts and outlays, but it is also equal, by definition, to the sum of private net saving (personal and corporate combined) plus [trade] deficit.
        http://www.guardian.co.uk/business/2005/aug/28/politics.comment

        The most important factor is the trade deficit, which was nonexistent prior to dropping the gold standard 40 years ago, but now chronically ranges between 3% to 6%. Godley would point out (indeed, did point out during Clinton’s short-lived budget surplus), the govt must run a budget deficit at least as large as its trade deficit, otherwise domestic private savings will unavoidably drain away until the economy drops in its tracks.

  • sinz54

    Keynes was not a socialist. He considered his theories as a temporary and targeted way to help the private sector in a major recession or depression. He did not intend for his theories to be cherry-picked and misused by left-wing politicians to justify a permanent and increasing role for government control of the economy.

    Yet that’s what we seem to have ended up with.

    The 19th century was a period of spectacular U.S. economic growth, with Federal expenditures amounting to just a few percent of GDP. But then look what’s happened since:

    http://tinyurl.com/3f7y4yq

    Throughout booms and busts, prosperity and recessions, there has been a long-term increase in the size of the Federal budget relative to U.S. GDP. It has now reached over 30% of GDP, an unprecedented level for a Federal budget for which only one-fifth of which is for national defense.

    If that trend were to continue, in another 25 years or so the Federal budget relative to GDP will be as high as it was during World War II–even though we won’t be fighting a world war this time.

    And let’s remember what the effect was back then: Wage-and-price controls to prevent inflation. Rationing to prevent shortages caused by wage-and-price controls. But at least back then, those ended when the world war ended.

    That’s our permanent economic future, unless this trend is reversed.

    Liberals keep protesting that this huge rise in the Federal budget is only temporary to deal with the economic slump. And they argue for even more stimulus. But how and when the U.S. economy recovers to the point that it can soar on its own without all this stimulus, they don’t explain.

    • sweatyb

      Tell us another one!

    • arturo

      SINZ54: “The 19th century was a period of spectacular U.S. economic growth, with Federal expenditures amounting to just a few percent of GDP. But then look what’s happened since:”

      What happened since is that the US and rest of the world moved away from gold and precious metal standards.

      On a gold standard, the mining sector had to run ongoing DEFICITS of gold in order to expand the stock of net financial assets. No one ever fretted about eventually reburying all the gold that had been produced. It wouldn’t have made any sense.

      Today, the Treasury and Fed are the ONLY possible sources of *new* (ie, not trade-related) USD-denominated financial assets (USD or UST). So it makes as little sense to fret about USG budget deficits today as it would have made to fret about gold mine production in the 19th century. In both cases, the only worry (apart from being colonized!) is inflation/deflation. And despite the relative size of current deficits, there is zero inflation to speak of.

      “If that trend were to continue, in another 25 years or so the Federal budget relative to GDP will be as high as it was during World War II–even though we won’t be fighting a world war this time.”

      A time of full employment and relatively stable prices. Hopefully it won’t take a war to relive it.

      “That’s our permanent economic future, unless this trend is reversed.”

      Get people back to work and the trend will reverse rather quickly.

      “Liberals keep protesting that this huge rise in the Federal budget is only temporary to deal with the economic slump.”

      Liberals are as clueless about this stuff as anyone else. As long as the Krugmans and Taylors of the world agree on (for example) the loanable funds theory and the other defective aspects of prevailing macro theory, we’re all screwed.

      “And they argue for even more stimulus.”

      Christina Romer said it would take more. Larry Summers didn’t believe her. Obama faces a much tougher time in 2012 as a result. And the rest of us have paid the price for the idiocy of Rubin/Clinton retreads.

      “But how and when the U.S. economy recovers to the point that it can soar on its own without all this stimulus, they don’t explain.”

      As above, the USG (Fed and/or Treas) is the ONLY source of new financial assets apart from exports (and technically those aren’t new). A federal budget deficit that fully accomodates savings desires in the household sector and supports a return to full employment will mean that the USG can return to running more ‘normal’ deficits.

      But it should (almost certainly) never ever try to run balanced or surplus budgets, unless you think (refer back to the gold mine ~ federal budget analogy) the Long Depression of 1873-1896 or the Great Depression were good things.

  • jamesj

    TerryF98: “Why are you still a Republican? You are 180 degrees away from the Tea bagging GOP right now.”

    Your statement is true, but party affiliation isn’t really what matters these days. The political climate in the US has changed so radically and quickly that most people haven’t had time to catch up and change the party affiliation listed on their voting card. I’m still a registered Republican despite my recent disgust with extremism and dogmatism in the party. What really matters right now is what policies we support. It seems to me that the modern Democratic party supports pretty much all of the economic and foreign policy policies that the Republican party supported 20-30 years ago. It seems to me that the modern Democratic party is clearly right wing in relation to the political landscape in any other industrialized nation. It seems to me that the Republican party is calling Democrats “socialists” as Democrats push forward a healthcare plan mostly written by Republican lawmakers 15 years ago and pushing forward a debt reduction plan that would have given Reagan’s economic advisers wet dreams. We live in strange times. Large chunks of the Republican party are focused on mindless populist scapegoating, but I assure you there are still large numbers of old-school Republicans silently eating crow and feeling ashamed about what’s happened. Are the old-school folks still “Republicans”? Does it really matter?

  • Watusie

    The Tea Party’s regard for fiscal responsibility in a nutshell:

    Venetian Casino in Las Vegas Sues Tea Party Group for Skipping Out on $600K Bill

    The Venetian Casino Resort in Las Vegas has just sued a Tea Party group for allegedly ducking out on a more than $600,000 tab. According to the lawsuit, the Tea Party Nation Corporation of Franklin, Tennessee booked more than 1,000 hotel rooms, conference suites and other services for a five-day convention in July last year. Two weeks before the event, however, the Tea Party group canceled, leaving a balance of $554,148 due to the Venetian. “Despite numerous requests for payment,” the Venetian’s lawyers claim, the Tea Party Nation “has refused, and continues to refuse, to make payment.” Apparently there was a clause in the hotel contract calling for 18 percent a year interest – which means the Venetian is demanding that the Tea Party Nation fork over nearly $88,000 in addition to the hotel bill, for a grand total of $642,144.

    http://blogs.laweekly.com/informer/2011/07/venetian_tea_party.php

    • PracticalGirl

      Fiscal responsibility is for the other guys. Got it.

      Tea Party Nation probably counted on their nimrod brethren in Congress to default on US debt and send everything into chaos. They’re damn lucky that the bean counters, and not the mob, are in charge in Las Vegas now. Nobody got sued in Las Vegas in the 60s and 70s. They just disappeared.

  • DFL

    I am waiting for Mr. Frum to declare ala Richard Nixon in 1971- “Here at Frum Forum, we are all Keynesians now.” So to keep contemporary living standards comfortable now, David Frum believes that we should steal from future generations. I would call that immoral and dishonorable. The more honorable alternative would be to steadily balance the budget with actual cuts over the next several years and explain to the people that the economy will likely be very slow growth for a very long time. It will be stagnation, but an affluent stagnation that includes 54′ televisions, NFL football, Harry Potter movies, $ 150 sneakers, $ 200 football jerseys, Ipods, Black Berries, Kindles and all the other yuppie gadgets that adorn society.

    • beleg

      This shows a fundamental lack of understanding of economics. Money spent to put people to work has a return on investment, in the form of taxes and in the form of lower cost to entitlement programs, and in the form of increased demand for a severely demand constrained economy. On the other hand, pulling money out of the economy has the opposite effect, it removes demand from a severely demand constrained economy, raising unemployment, lowering tax receipts and increasing the cost of safety net programs.

      The long and the short is, fiscal stimulus will raise revenues, while austerity will decrease them. Considering that two of the primary factors driving the spike in deficit spending are decreased revenue and increased safety net spending, it’s even possible that without economic growth to offset them spending cuts could increase the deficit.

      • DFL

        Then let’s enact something like the old Humphrey-Hawkins, hire 10 million to pick up trash in parks, make double payments to all government contractors irrespective of economic value, give every American a cheque for $ 5000, give every American a voucher for $ 2000 for summer vacation, and raise federal spending to 70 % of GDP. We’ll all be rich!

        • beleg

          So are you disagreeing that our economy is demand constrained, or that further reducing demand will make the existing problem worse? Or that increasing demand could spark growth?

          Or do you just think that increased deficits and a decade or more of near 10% unemployment are better than, what? We’re going to be borrowing just as much, because without economic growth our deficit isn’t going to get any better, even if we cut spending.

        • DFL

          Personally, I would prefer to constrain my current life style than force my six children to pay for me living beyond my means. For instance, my income is down 5 grand this year. I will take only one week at the beach rather than two in response. But I live pretty affluently and deserve no tears. I live a life style better than that of 90 % of the globe. And so do most Americans. I wish more Americans would get used to a period of slightly constrained affluence.

    • arturo

      DFL: “Personally, I would prefer to constrain my current life style than force my six children to pay for me living beyond my means.”

      That’s well and good for any person or entity that is not the sole issuer of the money everyone else uses.

      Under the classical gold standard, were gold mines’ ongoing “deficits” of gold a sign that they were living beyond their means? Of course not (aside from the finity of the underlying resource).

      If you and I want to save financially, some sector of the economy *MUST* dissave. In the 19th century, that sector was the mining industry. Today, it’s the federal govt, via some combination of Treasury deficits and *permanent* Fed purchases of something *other* than US Treasuries (ie, QE2 didn’t accomplish a damn thing). The latter rarely ever happens (it did at the height of the global financial crisis, but this is not a part of normal Fed operations). So federal budget deficits are a good thing economically, and a virtuous thing (as long as it stops short of causing harmful degree of inflation) as far as ensuring that savings exist in the rest of the economy for your grandchildren.

      Sounds weird, I know. But that’s how it works.

  • midcon

    With the economy, job outlook, and housing industry in it’s current shape, theories regarding long term debt, spending, etc. are lost on most people. Even in goods time such theories have little influence with the American people.

    Regardless of whether one is Democrat or Republican, conservative, liberal, or libertarian, the fact remains we, as a nation, are facing real economic problems right now, today, this minute. Our Congress and the White House need to stop looking at the calendar and start looking at their watches. Platitudes that things need to get worse before they get better are lost on and will not be tolerated by people who have trouble paying their mortgages and putting food on the table.

    Entitlement reform, while necessary, will affect the same people who are already have problems. Can we afford the double whammy? Arguments that temporary adjustments in spending results in permanent increases is valid, but those arguments are really a condemnation of the electorate who were given the right to vote without the knowledge and comprehension to make intelligent decisions.

  • Emma

    Our radical Republicans now believe that an economic depression at home, and probably worldwide, would likely be be a good thing. They won’t say it out loud, but they feel in their hearts that a depression would occasion a return to basics, a simpler time, where everyone (meaning: they) would have a clearer understanding of the world and their rightful place in it. Our complex stratification system would be reduced to two or three levels — the rich, the working poor, and the destitute. In this apocalyptic vision, the church (meaning: fundamentalist Christian) would occupy a larger sphere of influence, and government, intellectuals and Democrats would be cast into a permanent wilderness. God will be in his heaven, Darwin will be banished, Conservatives will fully control the Courts, the certified electorate will be predominantly white, and all will be right with the world once again.

    • baw1064

      Sounds like France in 1788…

      • DFL

        The problems of France in 1788 were largely caused by big deficit spenders from The Sun King, Louis IV, to Louis XVI and even many kings before The Sun King. French insolvency caused hapless Louis XVI to call up the Estates General which led to the French Revolution and Louis losing his head. Even wizard of the purse Jacques Necker couldn’t save France.

        • sweatyb

          no reason to think we might have a better grasp on economic theory than the French monarchs of the 18th century. no reason at all.

        • greg_barton

          So it’s no coincidence that the biggest deficit spenders for the last twenty years have been Republicans.

  • Sinan

    Finally someone actually brings up aggregate demand. It astounds me that AD has not been trumpeted every single day by the left and by rational economists as the ONLY concept worth considering during this recession. Bravo for Frum. Now all you other armchair economists need to explain how jobs are created in an era of decreasing demand. I welcome your thoughts…

    • beowulf

      “Bravo for Frum. Now all you other armchair economists need to explain how jobs are created in an era of decreasing demand. I welcome your thoughts…”
      You underestimate David’s powers– he keeps the readership’s aggregate demand for answers in equilibrium with his aggregate supply. His post from October clears the market.
      “Is Britain Moving to a Negative Income Tax?”
      http://www.frumforum.com/is-britain-moving-to-a-negative-income-tax

      Except for the govt providing income-scaled catastrophic health insurance & student loans and perhaps state/local govt revenue sharing, there’s not a lot else the govt has to do on domestic policy if tax expenditures and most every domestic spending program were zeroed out and the money put into a negative income tax. In fact, Nixon’s HEW secretary Elliott Richardson tried to do all of the above in early 1973 with his “Mega Proposal”. Alas, President Nixon (I think the single payer insurance was a bridge too far) kicked Richardson to the Pentagon instead and replaced him with Cap Weinberger.
      http://www.eric.ed.gov/ERICWebPortal/detail?accno=ED080148

  • kuri3460

    Everything the GOP says about lowering taxes on the wealthy in order to stimulate job creation is a combination of bad economics and wishful thinking.

    If you own a business, getting a tax cut isn’t going to entice you to hire additional staff.

    You will add staff if your sales increases, or if you bid more work. But in order for that to happen, or in order for you to be willing to re-invest your money into the business, there has to be an increase in the number of paying customers on the other end.

    With high unemployment, low consumer confidence, and tight credit, the number of paying customers on the other end, and the amount they’re willing to spend, is much, much lower than it was 5+ years ago.

    So government spending has become a de facto stopgap. It’s not ideal, and it’s far from perfect, but it’s reality. If the government cuts $100, $200, 0r $300 billion dollars in spending next year, whether it’s through federal pay freezes, entitlement cuts, or construction and maintenance projects, the end result is that individuals and business will wind up with less revenue and less income, and unless the tenor of the economy changes radically overnight, nobody will be stepping in to fill that void.

  • JimBob

    Frum, you’re economic illiterate. I suggest you order this book from Amazon.

    http://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232/ref=sr_1_1?s=books&ie=UTF8&qid=1311257958&sr=1-1

    Biggest selling book on economics in history and still in publication after six decades.

    • Sinan

      Your book is nothing more than Austrian economics crossed with popularism. The only thing that matters is success in economics. There are ZERO nations running on the Austrian Model, zip. And do you know why? Because it leads to revolution sooner or later.

    • arturo

      JIMBOB, Fed and Treasury replaced gold mines in two stages, c. 1934 and 1971-73. I’d bet Hazlitt understood that in a deflation, you’d need greater mine output under a gold standard, and larger budgetary and/or central bank emissions under a fiat standard. His assumption, of course, and that of the people who use his book as a foundation for economics, is that the latter two are always and everywhere inflationary (which empirically is nonsense). There’s nothing illiterate in David’s post, and thank God somebody with some influence is daring to use their brain.

  • billcarson

    > wasteful government spending is better then

    Still a typo in the article; the Heritage Foundation headline has the same mistake (please delete this comment if you correct it, thanks!)

  • NRA Liberal

    We’re fighting the last war—1978 stagflation.

    Human nature, I guess.

  • wiseone

    I can’t believe what I just read! Of course, government spending is necessary to maintain demand at this time in our fragile recovery. We own a small business. We make hiring decisions based upon how many clients come in the front door. We don’t care if they pay us with earned income, social security income, unemployment benefits or welfare benefits income. Furthermore, our taxes and/or tax rates never figure into our hiring decisions. It’s all about demand.