Chicago economist Casey Mulligan, writing in the New York Times‘ Economix blog, hypothesizes that increased government spending causes offsetting private savings (thus eliminating any stimulus effect), because people fear future tax increases and set aside money now to pay them.
This “economic” analysis is so perverse it barely passes the snicker test.
In a recession people save, if they can, because they are scared about their own financial prospects and those of their relatives–losing their jobs or their existing savings. Meanwhile, the financial industries, which are supposed to recycle savings into investments, fail to do so, because they see less potential for future profit. At the same time, increased savings means lower demand for current consumption, thus further reducing private profit potential and worsening the recession.
High savings plus low private sector investment opportunity means high demand for safe government debt. This has nothing at all to do with predictions about future taxes.
Even more important, it is absurd to simply assume that government deficits are the result of “dissaving.” To the extent the government is doing its job, they are far more likely to be “investing” — which, just like private investing, should increase future growth and therefore reduce the burden of future taxes.
To be sure, spending on pointless wars and subsidies for incompetent bankers or excess consumption of corn has little productive value, just as private sector “investment” in novel financial instruments designed primarily to hide risk from bosses, investors, and regulators does nothing to increase future growth. And the upward redistribution of interest payments to private sector bond holders, just like private sector CEO salaries and bankers’ bonuses, probably reduces future economic growth by increasing inequality and the inefficiency associated with it.
But much government spending is investment that should lead to higher economic growth in the future: education; support for R&D; police; EPA, SEC, and other market regulators that are essential to keep markets functioning and useful; roads, airports, trains, and other transportation infrastructure; regulation and maintenance of airwaves, internet, and telecommunications infrastructure; water/sewer and public health measures; dikes and volcanic monitoring; fire departments and disaster clean-up, etc.
Competent spending (as opposed to handouts to industries with well-oiled lobbies) in these areas will increase future incomes, not reduce them. Even incompetent government investments in these areas are at least as likely to lead to future growth as parallel private sector “investments” in developing flashier packaging for breakfast cereals or more complicated billing methods for airlines and cell phones, or ever more dangerous methods of deep-sea oil drilling.
Another large part of government spending, particularly of the federal budget, is simply insurance (Social Security, Medicare, and Medicaid). This spending obviously increases economic growth, like any insurance, by eliminating risks that people would otherwise need to take excessive precautions against. Individuals must prepare for, or at least fear, the worst case scenario, while collectively we need only be concerned about the average. Each increase in social security, thus, frees up private funds for more productive uses, assuming the private sector can find some.
Finally, direct government spending to produce jobs in the middle of a demand-deficit recession is a pure, cost-free benefit even if the jobs themselves produce little. Someone gets a job and can be productive instead of a social cost. And, since no social resources are diverted from other purposes, it costs nothing at all. On the contrary, it increases future growth, both by keeping an individual in the job market and maintaining their skills and by reducing the massive costs of unemployment on him/her and family. If the jobs are actually useful, like public school teachers, highway builders or most other government employees, that’s an additional benefit.
If this were a purely academic controversy, the answer to Casey would be that there is no need for complicated, counter-intuitive models in which people are assumed to make irrational assumptions about the future based on false economic models — that government spending to reduce unemployment or invest in the necessary underpinning of economic growth will, instead, reduce future economic growth — when simple explanations work better.
But this is not merely a matter of economic models. Fundamentally, Casey is not making an economic point at all. He is simply attempting to establish by repetition the fundamental political points of the contemporary American predatory class: “government is the problem” when it attempts to limit private predation, and upward redistribution of wealth to the wealthiest — whether by government, corporations, or markets — is good. When the political issue of the day is increasing unemployment benefits or national health care, deficits are bad — not because they are “dissaving,” which is patently false, but because they are insufficiently expressive of the view that the only legitimate purpose of government is to make the rich richer. When the political issue is taxing financial transactions or obscenely high incomes, let alone wars to overthrow hostile regimes in oil-producing countries, deficit reduction will suddenly be of less interest.