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Thursday, November 01, 2012


Government Intervention?

WARNING: The following is uncomfortable for me to talk about and may offend others…
After reading another article in The Economist, I am once again, reminded of Prof. Eubanks saying that “a good government is one with which its people prosper”. In this case, however, the author of the article is not talking about protecting private property rights. I am typically one to criticize a government for getting in the way of the private sector by taking on the role of job creator, but as the article reminds its readers, timing is everything and sometimes government spending can actually do more good to help the economy to recover than just sitting back and letting things work themselves out. The severity of the Great Depression as a result of laissez-faire economic tactics is really the only evidence needed to support the idea that sometimes it may actually be better for a government to act. Although I am one to argue that it is usually better in the long run to let things run their course, I have to consider that without government intervention, there may come a time that the economic state of the U.S. becomes so beaten down that there is no way to recover and “The Land of Opportunity” will crumble.
I realize that advocating for government intervention is uncomfortable for many of us. Perhaps, it will help to stress that there is a “tipping point”, where the amount of government spending used to stimulate the economy causes the net result to be extremely negative. Particularly in recent times, it seems the amount that has been thrown at the current situation (combined with policies that have largely disincentivized private sector job creation) may be considered something that has kept us “afloat”, but that has severely worsened the near and long-term economic forecasts. So alongside timing, balance is also key, meaning that when it is clear one government stimulus tactic is not working, doing more of the same thing is not going to make things any better. We are seeing the consequences of ignoring this very simple rule right now. The increased spending and debt accumulation that the U.S. government has acquired is not sustainable; it must be reduced. This means that many of the jobs kept or created with government “aid” will be lost in the near future, adding to the already millions of unemployed individuals.
So, even though it is uncomfortable for me to admit, in the face of severe economic decline it seems better for the government to act than not to act. It is, however, even more important that the correct tactics are used, in able to avoid situations like the one we are currently dealing with.

"timing is everything and sometimes government spending can actually do more good to help the economy to recover than just sitting back and letting things work themselves out."

Perhaps time is everything. On the other hand, perhaps we need to consider the explanation for the recession before we consider whether government intervention can "help." If recession results from "mal-investment," the recession is the period of time during which the mal-investment is corrected. If this is the case, timing not withstanding, government intervention will muck up the correction.

Consider also that our governors don't have crystal balls. They are unable to see the future, and therefore I suggest we should not expect them to know how their intervention can force a worthwhile correction.

Still, I can see the appeal of the suggestion that goes something like "but something has to be done." That something seems to be government spending.

So, I ask: "Please, tell me specifically how government spending is supposed to help?" Whether you agree the recession means allocative corrections are necessary or not, why should I think government spending will help?

In trying to formulate an answer to this question I suggest we ask where government spending will come from. One place government spending can come from is taxation. Can that help in recession? I suspect you will say no. But, suppose my last point about knowledge is incorrect. Suppose our governors can see where resources should be reallocated for the correction. In this case our governors can take money from "the people" who have not been spending their money in ways to make the correct, and then spend that money in the ways needed for the correction. But, of course, our governors do not have this knowledge, and cannot have this knowledge. This means that taking money from us to spend is like moving chairs around in a classroom. I can't see how this helps with a period of recession.

So, let's consider another way government can have more spending. Government can borrow money. This is the idea of running a government deficit, or in the case at hand I suppose increasing the annual government deficit. Is this an idea that makes sense? Let's borrow money from our futures and from our children's futures, so that more people will be employed during the recession and the period of allocative correction. The money we borrow comes from our future incomes and the future incomes of people who can't even vote no yet. Even if it makes some sense, it seems intergenerationally unjust to me. But, it also seems foolish to borrow from my future income for such a reason. Of course, I suppose I can see the appeal of borrowing against your future income so I keep my job. Well, perhaps you can see the justice in that, eh?

I can think of only one other means by which government can spend. Government can simply make more money. Do you know the best way to define inflation? Inflation is an increase in the money supply. Does it make sense to try to make the correction through spending that creates inflation? Well, I guess putting the question provides us the answer as well?

I can't make sense of supporting government spending in response to recession for at least these reasons. Do you think I have it wrong? Should I change my tune in support if timing is right?
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