Only Smart Spending Drives an Economy

Gary Burtless at the Brookings Institute makes a concise point that I feel is important to remember while being bombarded by the US government deficit debate. He inadvertently exposes some wrong-headed thinking at the same time.

The federal deficit represents a serious long-term problem. It is not, however, a threat to our economic recovery, nor will it be a threat anytime soon. Our near-term problem is weakness in private demand rather than excess government borrowing.

The most recent CBO forecast predicts a deficit next year of $1.43 trillion, or a bit less than 10% of expected GDP. While this is a shockingly big number, it is unlikely to pose an appreciable risk to the recovery. On the contrary, the tax and spending policies that cause the deficit are providing much of the stimulus that has reduced the severity of the recession and given us the prospect of an economic expansion this year and next.

It's true that the US still has a vast capacity to borrow, especially if Japan is any guide, and that US debt is unlikely to be a problem in the near-term.

Yet at the same time, we need to stop fearing lower near-term demand in the economy. Adding debt just to boost near-term demand data is from beneficial to the economy in the long term because not all spending is good.

This is because only smart spending decisions, whereby $1 spent ultimately results in more than $1 of value for the buyer, will grow an economy sustainably in the long-term. Less-than-smart spending, whereby $1 spent ultimately delivers less than $1 of value, may at first look like "growth" given that the spending numbers will show up in near-term data, but will in the end be value-destructive.

The problem, of course, is differentiating the two kinds of spending, which is almost impossible to do from 30,000 feet high at the government level.

Thus, weak demand may actually be a sign of smarter spending in the economy. While demand as a dollar value may appear lower, it is likely a higher quality sort of demand, whereby people and companies on balance are making smarter spending decisions.

As long as this is the case, whereby more smart demand is happening than less-than-smart demand, then net-net value is being created and we have nothing to fear.

What we should truly be scared of is the potential for well-intentioned yet naive policies pushing people into making more dumb spending decisions than smart, destroying value throughout the economy in the process.

To do such a thing, while adding mountains of government debt in the process, would be catastrophic.

Comments

[prudentinve...:]

This is a very well written and thoughtful article.

".. What we should truly be scared of is the potential for well-intentioned yet naive policies pushing people into making more dumb spending decisions than smart, destroying value throughout the economy in the process ... To do such a thing, while adding mountains of government debt in the process, would be catastrophic ..."

In your last sentence, I think "is" is more appropriate than "would be", because this is already happening. Moreover, it has been happening since the bubble era began in the mid-90's, except that the dumb spending had been financed by private debt, which has naturally collapsed, thereby proving its intrinsic "dumbness".

So, to continue the party of dumb spending, we, the public, have assumed the costs of the collpased dumb debt, and further augmented it by even greater public debt.

Aug 23 09:13 AM

[Prudent Man...:]

Late Friday evening the Congressional Budget Office (government bureaucrats, so inefficiency is their model) project the deficit at $9,000,000,000,000.00. Since it had been released I have heard only one mention of it in the media. This figure means that the per capita debt will be $300,000.00 or $1,200,000.00 for a family of four. Tell me how this is going to be paid? Taxes, at most a little as politically unpalatable. Devaluation of our currency, probable as their isn't any catalyst for growth, except for deficit spending, that I see on the horizon.

We have been ardently devaluing the dollar for the past year in order to increase exports. That hasn't worked and if it does those countries whose exports decline will no longer be able to purchase our debt.

Devaluation of the currency means, virtually, stealing from the savers, retirees, those on pensions, the producers of the nation to support the bureaucracy and other parasites. Obviously, the devaluation must be more intense. Will our creditors accept that? Who knows in the world of geopolitics. The only things that have the U.S. from exploding interest rates is government manipulation and that the rest of the industrial nations have lived too high on the hog and on the cuff.

Markets will do what markets do: move on mob psychology and the inertia will take them in whatever direction of least resistance. Reason is always trumped by greed and fear. The major question in my mind is how much will the currency be devalued before our creditors say Stop?! I have spent my life avoiding debt and creditors and being dependent upon them but my collectivist government is forcing me into debt, against my will when the forces of the Free Enterprise System would have corrected our structural imbalances quickly by making those who caused the problems pay the price instead of profiting, at my expense, from their fraud.

It will be interesting to observe the reactions of "the entitlement generation" when they find the till is empty. Why doesn't anyone ask if Health Care would be less expensive if we didn't have Medicare? Just a thought.

Aug 23 09:46 AM

[John Bowman:]

Excellent insight!! You have summarized everything I believe in a couple of paragraphs.

Failure is literally baked into our system, especially during the last 10 months of bailouts and stimulus packages.


On Aug 23 09:46 AM Prudent Man CFA wrote:

> Late Friday evening the Congressional Budget Office (government bureaucrats,
> so inefficiency is their model) project the deficit at $9,000,000,000,000.00.

Aug 23 12:00 PM

[whidbey:]

Mostly metaphysics at the very best. The discussion of smart v. induced spending is unbelievably dense, not to mention debatable. Your apparent point is that

1. No debt level problems if we buy the "right things" to create value. Fairly thin soup is it not?
2. No more stupid stimulus programs? Which kind?
3. We could have problems, if your standards are not met, which you can not define with example or classifications.
4. Are you kidding us, or just a dumb as you appear?

Aug 23 07:10 PM

[jack dee:]

could explain point four a little more? one two and three seem valid, and I agree, but four...


On Aug 23 07:10 PM whidbey wrote:

> Mostly metaphysics at the very best. The discussion of smart v. induced
> spending is unbelievably dense, not to mention debatable. Your apparent
> point is that
>
> 1. No debt level problems if we buy the "right things" to create
> value. Fairly thin soup is it not?
> 2. No more stupid stimulus programs? Which kind?
> 3. We could have problems, if your standards are not met, which you
> can not define with example or classifications.
> 4. Are you kidding us, or just a dumb as you appear?

Aug 24 12:00 PM