Daniel Mitchell, from the Cato Institute, offers this new educational video on government deficits and spending. I had the pleasure of listening to Dan Mitchell speak at Cato University 2009, focusing on the existence and justification of tax havens, and the damaging effects of government taxes on entrepreneurship, investment and economic growth. In this new video, he provides us with a valuable and all-important lesson:
The only disagreement I have is with one of the introductory statements. The video makes a distinction between spending which funds long-term benefits (i.e. investment) and spending which is wasteful and only brings about short-term satisfaction (i.e. consumption), and applies it to government spending. It later provides an analogy by applying these two distinctions to household deficit; borrowing for a business which will generate revenue over the long-term, and therefore make the interest rate (price of borrowed capital) bearable, compared to borrowing for consumption spending, which will not lead to long-term revenue, and will make paying the interest less bearable (or unbearable). I think that Dan Mitchell would agree that government generally does a poor job in investing and therefore all government expenditure can usually be lumped under consumption.
My disagreement specifically deals with the lesson’s caveat that government spending is OK while it brings about long-term benefits. There is no clear distinction on what type of government spending is justified, and so by adding the aforementioned caveat it seems to open the door to a wide possibility of justifications for different government programs which are definitely not beneficial over the long-term (such as, let us say, social security). While I think that the distinction should have been made clearer (with less room for interpretation), as I said before the video was made for a mainstream crowd.
My disagreement is an unfair distraction. The point of the video is: while government deficits and temporary government spending can be dealt with if productivity increases to such a degree to which it makes paying the interest on the debt bearable, this relationship fails to hold true if government spending continues indefinitely and productivity falls. So, while paying for the Second World War caused no major harm to the American economy, because high spending ceased after the war, today we are burdened with ever increasing government spending which shows no signs of receding. This is due to the unfunded liabilities created through government welfare programs. Indefinite spending will have to be paid for by higher taxes, which will take a toll on productivity.
When it comes to the actual argument of the lesson, Daniel Mitchell (as usual) hits the nail right on the head. The key is reducing government spending to a bare minimum. Realistically, in today’s world, this means reducing government spending to that which covers only “bare essentials” (such as security). Ideally, this means abolishing government spending altogether.
Wait a minute – since when is consumption spending “wasteful” simply because it is short term? Why is satisfying short term needs “wasteful”.
I’m also not so sure about this: “This is due to the unfunded liabilities created through government welfare programs.”
It’s not the welfare programs that are the problem – it’s the social insurance programs (Social Security and Medicare – although mostly Medicare). There’s nothing “welfare” about these programs. I’m concerned that by mislabeling these as “welfare” you’re giving the impression that actual welfare (food stamps, TANF, Medicaid, SSI, etc.) is unsustainable. Despite an uptick in usage during the recession, these programs are actually becoming less significant as a part of the budget – they’re becoming more sustainable, not less. It’s the social insurance that’s the problem.
Daniel,
Wasteful and beneficial is used, in this case, only in the sense of whether or not spending “creates wealth”. For an individual, consumption provides present-term utility, but over the long-run it does not create wealth. This isn’t an argument against consumption per sé, it’s an argument against government consumption. An individual has the right to do as he pleases with his money, and so whether wealth is destroyed or created is inconsequential. The government does not have this right when using other people’s money (i.e. taxpayer’s money).
In regards to welfare, social insurance is lumped under the “welfare” umbrella for all intents and purposes. It is a product of the “welfare state”.
So it’s not REALLY an argument against government consumption – it’s a conclusion about government consumption that is contingent on your assumptions about government.
I don’t see how social insurance is like welfare. Welfare serves and inter-personal redistributive function. Social insurance serves an inter-temporal redistributive function. I think you’re playing with fire by equating the two – you’re muddying the waters.
Daniel,
No, it is very much an argument against government consumption (and, well, personally I would extend that to government investment, as well). Arguments against government spending are already well covered by the likes of Henry Hazlitt and other free-market economists.
On welfare, let’s appeal to the Wikipedia definition:
Whether the spending is temporary, like food stamps, or whether it is to guarantee the long-term well-being of the “individuals in need”, it is all still welfare. You are splitting hairs.
Daniel,
I sincerely believe you are wrong here. The government solely revolves around consumption. It produces ZERO. By diverting resources and skewing the consumption-investment ratio, individuals are that much poorer because of it.
The fact that you can some how justify a government service such as food-stamps, where the government takes pecuniary funds out of YOUR own pocket and gives it back to you in the form of food stamps is quite comical. It’s your money in the first place. The government isn’t providing anything per se.
Taking a minarchist approach to this, the best and most obvious course here to take would be to: cut spending almost completely (reduce government infinitesimally), ditch the income tax, obviate all tariffs, abolish the FED, and pave the path for a free banking system.
Obviously almost none of this would happen- unfortunately.
We are headed into a brick wall at 500 MPH. There is simply no way around it anymore.
As always Jonathan, it was a good post.
Jonathan -
OK, if you want to use that definition that’s fine. But then that engulfs all government spending. Certainly we can appeal to something better than an intro sentence on Wikipedia.
LvM -
RE: “The fact that you can some how justify a government service such as food-stamps, where the government takes pecuniary funds out of YOUR own pocket and gives it back to you in the form of food stamps is quite comical. It’s your money in the first place. The government isn’t providing anything per se.”
I don’t receive foodstamps. If I and people in my income bracket did receive food stamps, I’d agree – it would be quite pointless.
RE: “We are headed into a brick wall at 500 MPH. There is simply no way around it anymore.”
Yes… that’s been the fear for several centuries now. That wall never seems to materialize, though, does it?
Certainly this does not help with the recent round of spending.
Centuries? America has only been around for two and change.
I don’t know if this actually occurred to you, but the American dollar isn’t in exactly the best shape right now is it?
I never had understood this game of chicken where we basically inflate the currency exponentially to see if a wall actually materializes.
Eventually the bullet will be in the chamber and you will fire. There is no point in taking these orthogonal chances.
Chance is ephemeral by nature.
Daniel,
Well, that definition actually does not encompass all government spending. Although I, as you should already know, do believe that all government spending is wasteful (or, at least, that it could be provided better by a free-market, although I am not entirely an anarchist either, and so to some degree I do contradict myself), there is some type of line drawn up between government spending with the intention of directly benefiting individuals in need (such as health care, food stamps, unemployment, et ceterae) and government spending which supposedly benefits individuals indirectly (i.e. wars). There is, of course, also “corporate welfare”.
I paint with such a broad brush because it’s honest. If you argue differently you are splitting hairs, and in extension avoiding the actual point of the argument.