A Response: Why Levi prefers Direct Government Spending

Let's start with a question... What is more stimulative, tax cuts or food stamps.  The answer may surprise you.  It's food stamps, and the same is true when it comes to tax cuts for people below a certain income level.  When you give rich, upper middle class or even middle class people a tax cut generally they save it or put it on debt, which doesn't have a multiplier.  In order for any money put into the economy, either through tax cuts or direct social investment it must be spent.  

Let's take the Bush tax cuts for example...  $300.00 or $600.00 per couple.  What did I do with my $300... I paid off a credit card and then closed it.  That did nothing for the economy...  What did my parents do with their $600.00.. they put an extra payment on the house... which did nothing for the economy.  But what did my friends who were just making ends meet do?  They went out, and bought food, and an Xbox to provide the family with entertainment.  I didn't adjust my spending habits at all, but they did and bought a luxury and therefore stimulated the economy.  So it would have been better stimulus, to give me and those who make an income higher than me nothing and double or triple my friend's tax cut.  OR as many poor people don't make enough to pay any taxes, perhaps double their food stamp allowance, or increase the earned income tax credit, or... I could go on.  The point is tax cuts for the rich are of limited stimulative effect.

Pivoting to direct government investment. When the government pumps money into an economy directly it had multiple benefits.  Large government infrastructure investments employ people... the workers, the suppliers, the food vendors nearby... and allow for greater economic activity.  Adding light rail between Seattle and Tacoma will increase the flow of people and therefore the flow of money.  Adding lanes to I-5, finishing 167 or the cross-base highway will allow goods and services to flow more effectively across the region.  Paying states not to lay off teachers will have the net benefit of smaller class sizes, improved education (which will pay long term benefits), and oh yeah, keeping a skilled and specialized workforce employed and spending money.  The benefits of direct government spending are large, but hidden.  How do you know the state worker who lives next door to you kept his job due to the stimulus?  But you do see that $300.00 that you ended up using to pay off that credit card.  Tell me, what has a higher long term economic benefit.. a $40,000 a year job as a teacher... or $300?

Tax cuts to billionaires will go into savings accounts, or hopefully stock portfolios to increase capital available for investment, but we really can't say because as a society we have no control over what people will do with that money.   Additionally, there is a lag time.  You can cut taxes, but it will take people a while to realize they have more money and spend.  A $1,000 a year tax cut comes down to an extra 83.00 a month... what will you use it for?  Will you even notice? 

How do you Stimulate an Economy? Part 4 - Taxing to Spend

In light of my previous post on the benefits of government spending, you might wonder why I claim that reducing taxes is the better option in an even earlier post.

The problem is that both are necessary for a healthy economy.  Government spending is beneficial to the economy, but low tax rates are also beneficial.  The problem is that one requires the opposite of other (though you can delay the taxation by increasing debt).  So if you increase government spending (good), you have to increase taxes (bad) or if you decrease taxes (good) you have to decrease spending (bad).  Either extreme is bad so it isn't a question of which is better for the economy, the question is what is the correct balance point.

In both cases the benefit is diminishing as you increase the levels.  Increased spending when spending is very low has a much higher benefit than it does when spending is high.  The same is true for taxes, the lower the rate the less benefit you have from lowering it further.

For me it is less a question of which is better and more of a question of where the balance point is.  There have been times when using spending would offer benefit despite the necessary raise in taxes and others where the reverse is true.

As for where we are at in the US today, I don't believe that increased spending is going to have an overall positive effect.  The outstanding debt is far to high and is rising far too quickly in an unsustainable way, which means taxes will have to increase to cover the cost.  The concern on what that increase will be, who it will affect, and when it will happen is having a hugely detrimental effect on the economy already. While there are many positive aspects to the spending programs which have been put in place in the past year, they also come with that significant negative.

That negative is compounded by the uncertainty of how the deficit will be handled, especially in light of how much debt the US has and how quickly it has risen.   The ability of the US government to continue spending on credit has a limit and there are signs that limit is approaching.  Further spending is going to exacerbate the problem even as it provides the benefits I have mentioned.

If the US had limited or no debt, then spending might be a good answer, though it does come with some risk.  With spending levels already high and debt levels very high, I believe that the overall effect of increased spending not only doesn't help the economy, but I believe there is overall harm being done.

How do you Stimulate an Economy? Part 3 - How Government Spending is Good for the Ecomony

So far with only me posting things have been a bit one sided.  I do, however, have points that I can make on both sides of most issues.  While I believe that economic stimulation from the government should mostly be based on reducing taxes (which I detail here), there are many benefits to using spending as a stimulus.

Government spending allows for development in areas which are either not directly profitable, or which will show profit only after too long of a term to make it a palatable investment for the private sector.  Just because the initial venture isn't profitable, however, doesn't mean that there isn't substantial economic gain to be made, sometimes that venture will lead to others which turn a profit.

A clear example of this from the past is the space program. In the 1960s and 1970s building craft and systems capable of exploring the solar system, launching satellites, and putting people on the moon were not economically viable programs.  While today that has changed, much of what has enable private industry to begin looking to outer space is a direct result from what NASA has already done.  Indirectly there were advances in technology made to overcome the challenges of NASA's missions which where helpful for hundreds of other industries (NASA calls them spinoffs and has over 1600 of them in a database they also have a flash driven summary).  In any case, there have been thousands of products which would have been either impossible to make, much more expensive, or vastly inferior had it not been for the space program.  The space program significantly contributed to the economic growth which resulted from these products being developed cheaper, faster and better.

A current example that most people support is energy research.  Alternative energy sources are mostly not economically viable for the private sector because they require too high of investments in the development of new technologies to make them either feasible or economically competitive with existing energy generation methods.  If the initial investment is not made by government spending then the growth of these industries will be very slow.  Government funding into this area, however, could result in a huge boost to the economy as new technologies are created to solve problems of energy creation.  Even if none of the primary objectives are successful there are bound to be both short and long term benefits through technological advance and short term job creation.


Since government spending is not used to create direct profit, it can be used on areas which do not create a direct financial return on the investment, but also on programs which increase the quality of life, and therefore the wealth, of people.  Examples of this are the creation of roads, power grids, and other infrastructure type projects.  While there is little direct return expected from these ventures, and therefore little incentive for the private sector to get involved, these projects also allow for economic development.  Increasing roadways allows for reduced transport times and therefore costs which not only helps business with delivering goods, but also people by reducing their travel costs.  Less time commuting, shopping, driving kids, etc. results in more time for people to use to enrich their lives.

Finally, the government is run by people who can be held directly accountable to the people.  Politicians have to act in the interests of most people or risk the loss of their position.

So government spending is necessary to a healthy economy.  It drives stagnant industries forward when long term investment is required and creates short term boosts to the job market by creating a demand for products and services to overcome challenges which the private market is not yet willing to take on.  It also allows for more indirect wealth creation since it is not limited to direct profitability.  For all these reasons, we need to have a healthy amount of government spending to strengthen the economy.

How do you Stimulate an Economy? Part 2 - Why Aaron prefers Tax Cuts

In part 1 I discussed how difficult it is to even know what is the correct course of action to take to help improve an economy.  The is both a remarkably complex system and one in which seemingly small events can have massive impact.  Mathematically speaking it is a chaotic system, which makes it very hard to predict much less guide and control.

That is the primary reason that I prefer using tax cuts to stimulate the economy. While I don't think businesses are inherently any more competent or less corrupt than politicians, the bottom line is that there are many more of them and their methods produce success or failure much more directly for them and much more quickly.  This leads to a system in which many different plans are attempted and ones which lead to success are emulated and refined while ones that lead to failure are discarded.

Now of course, on major drawback is that these plans are not designed for the benefit of the economy, but rather for the benefit of the company, or the company owner/shareholder.  Such actions, however, almost always also increase the overall economy.  Making businesses successful is the key driver in making the economy healthy.

The plan of using the government spending, provides more direct control of things into the hands of fewer decision makers.  That can be a good thing, especially when there is a clear case of something that needs to be done.  A good example of this, and something good that is in the current US stimulus is funding research into non-hydrocarbon energy generation.  While I have some disagreements with the details of how it is being done, overall it is a good program to use government funding to promote this research.  However, that is because even if it isn't something that will directly help the economy overall in the near term (it in help in many ways and hurt in many others) it is something that, if successful, will help the economy greatly in the long term by reducing the costs (either political or economic) of energy.  Because it is clearly beneficial to the economy and may be too long term to be correctly promoted by business it is a good candidate for government funding.  However, those cases are, I believe, limited in number. 

It is far more often that we don't know what the best path to promoting the economy is and when that is the case I prefer, to steal the term from Glenn Reynolds, an Army of Davids to the management of a Goliath.  As we decrease tax burdens it increases profitability and therefore incentive for new players to enter with new ideas.  Yes, we also get old players with old ideas, but failing ideas lead to either abandonment or failing business, successful ideas lead to emulation.  

So while I think that both spending and tax reduction can and to stimulate the economy in some ways and depress it in others, overall I prefer tax reduction because it empowers larger numbers of solutions to a problem that we don't understand well enough to have all the answers for.

The Stimulus (pulled from a Facebook discussion)

This is something of a summary of my thoughts which were originally in response to a Facebook post started by Levi.   His posting linked to an article (link) discussing how President Obama's recent stimulus is having an effect, but it is perhaps a slower one than people expect.  His comment from reading the article was that turning around anything the size of the American economy would take time and that the large numbers of Americans who see the stimulus as a failure are being too impatient or perhaps not realizing that this is going to be a slow process.

In response, I argued that most of that problem is not so much with the American people as it has been with the messaging and communication of the White House and Congress on the issue.  We have been given dozens of projections which have consistently been very overly optimistic.  There have been regular communications of how things are getting better soon.  When the stimulus was passed, the projections of how bad things would be without it turned out to be better than reality, and the projects of how things would look with the stimulus looked to be wildly optimistic at best.   We are just leaving the time labeled by the administration as "Recovery Summer".  Though there have been some remarks from the President that recovery would take time, the overriding message for most of the year has been announcing that change is here and that things will be better soon.

The actual merits of the specific stimulus as well as the concept of using large scale government spending is something that my co-blogger and I very much disagree on and will certainly be a discussion in the near future here.  Regardless of the merits of the stimulus, however, the messaging from the White House has been terrible.  While I agree that we are, by and large, an impatient people, we are much more so when speed is part of the selling pitch.  I don't expect to sit down at a nice steakhouse and be served immediately, but if I were in McDonalds and had to wait for 20 minutes to get my food I would be pretty upset.  If you want to sell me on a long range plan for turning around the economy, fine, I'm wiling to listen and judge the plan on that merit, but when we emerge from the "Recovery Summer" program and there are very few positive economic indicators, can you really blame me for starting to doubt your plan?