Friday, July 8, 2011

Common sense view of government spending and debt

Imagine that you are a shop keeper in Anytown, USA. All of a sudden, a rich man moves into town. He starts spending a lot of money all over town, including at your shop. This makes everyone very happy, because the shop keepers make more profits, and they turn around and spend a lot of their profits locally as well. Now imagine that the rich guy likes it so much that he encourages another of his rich friends to move in about six months later. This guy likes to spend money too. Now things are really booming. Anytown shop keepers have never seen so much business. Some of them have to build additions onto their warehouses and hire more employees. This new rich guy has yet another rich friend of his own, and another six months later he encourages that person to move into town. Fortunately the local shop keepers expanded, so they are able to keep up. However, a substantial portion of the local economy exists largely to fulfill the needs of these three rich men.

OK. Now, what if, all of a sudden, all three of these rich men decide that they want to save their money and they stop spending, perhaps because they all become convinced that saving money is "virtuous". In fact, they pack up and move out of Anytown, never to return, because it reminds them of their free spending past. I suppose that from a personal virtue point of view they are sticking to their principles, and bully for them for doing that.

However, it doesn't take a person with a degree in economics to figure out that this kind of dramatic drop in spending will be catastrophic for local businesses. It's true that, only a year and a half ago, locals all managed to survive without any of these rich men living there. But now they have taken out loans to buy bigger shops and have more inventory on the shelves. They have way more employees than they used to. Some people even moved to Anytown in order to take these jobs.

Clearly, the local economy is going to go into a tailspin. It won't be as simple as returning to the way that things were because shop keepers and their employees took out loans to buy houses and cars of their own with the excess profits that were being generated. The bank won't let them just give those back, and anyway, interest is owed on those loans.

As it turns out, this is exactly the kind of situation we would be in, only on national scale, if House Republicans, aided by their bed-fellow Barack Obama, cut $4 trillion dollars of government spending out of our economy in the next ten years, as they are currently proposing. Of course, now that I said something partisan, the bickering will begin. Some of you guys will start spouting talking points that you heard on Rush Limbaugh or Sean Hannity. The national debt is too high. We can't keep doing this forever! We need to stop borrowing so much money. We can't afford all that interest. Those all sound like reasonable concerns, in the abstract.

However, let's at least not kid ourselves about one thing. Anytown is going be far worse off than it was before. Imagine that, even with these rich guys buying things, that some people were still barely getting by, and that there were still plenty of people who wanted work who could not find any. Things are not going to be better for these people when the rich people stop spending. There will be more people out of work, and therefore the competition will be even harder. Maybe these rich men are right that saving money is "virtuous", but it certainly will suck for the labor market. You can't tell me that cutting spending will be a good thing for the employment market. You can't hire someone without spending money, and if there is a lot less being spent, there will be less hiring.

It's also worth pointing out that nobody much cared where these rich guys got their money, in the first place. Well maybe one or two cranks were concerned that these guys were Mafia or something, but there was no proof, and if they are Mafia, you probably don't want to make them mad by refusing to do business with them based on rumors alone.

As it turns out, the for purposes of this story, none of these rich guys were criminal. However, you don't know where they got their money. They might have carefully saved it, or they might have borrowed it on their credit cards. Are you as a shop keeper going to interrogate them about it or are you going to make the sale?

All you know now is that a dramatic cut in spending will not be good for most people. It might be good for the rich people, at least in the short term, to save money, but pretty soon they will have no place to buy any goods and services. People will move out of town, and it will fall into disrepair. Even the rich people will not be able to sell their homes for what they originally paid, because who wants to live in a place where there are no stores or jobs.

It might seem "virtuous" to "cut spending", especially if a person is spending on a credit card, but everything has tradeoffs. For every cause, there is an effect. What effect are we trying to create?

To the causal observer, it almost looks like Republicans are trying to make the economy of Anytown worse, instead of better. Why might that be? Could it be that they think this could benefit them in elections if they blame the bad economy on other people, like the Mayor Barry of Anytown, who actually got the first rich guy to come to town, and tried his best to encourage them to stay? Could it be that they have other rich friends who plan on buying things up, once the economy is in the dumps? Could it be that they want the government of Anytown to be so impoverished that they can be easily swayed by someone with a lot of cash who will be able to dictate his terms, regardless of whether such plans are good for the people who live there?

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