I’m troubled by “economists” who talk about “our side” and “their side” and whose theories make the claim that certain fundamentals of economic theory–like ‘supply/demand’ curves–are no longer valid under their theory without proof.
It all feels like they’re simply justifying whatever rational ends they want to reach rather than considering the ramifications of those ends.
Regardless, at the bottom of the government spending stack are a few basic truths that no economic theory can rearrange:
(1) In general, government spending does not generate wealth. (Yes, there are exceptions–but they are narrow and often under-funded, like money spent on basic R&D.)
Nor should government spending generate wealth. To do otherwise would be to require (for example) ‘policing for profit’ and require prisons to be turned into slave labor camps. Both of which lead to their own collection of sociological problems, such as exacerbating inner-city distrust of the police and creating perverse incentives to lock more people up.
(2) Overall the basic metric of the size of government–regardless of how it is funded–is the percentage of GDP that is devoted to government services (and I personally believe ‘GDP’ should not measure government services), and what percentage of the population work for the government–either directly as employees or indirectly as contractors.
That is, what size of the economy is devoted to these (generally nonproductive, though absolutely necessary) services.
(3) Government regulatory compliance creates a drag on the economy, especially on smaller corporations who (unlike Apple) cannot afford to hire lawyers to work full time on compliance.
Consider (3) a sort of quasi-subset of (2); in a sense, every regulation requires private corporations to hire and pay for “government contractors” to do required government work. (Albeit paperwork, but even so.) That even includes people who do tax preparation; think of them as a private government contractor you pay to do the government work you’re otherwise required to do.
How many government contractors can your local flower shop pay for?
We don’t think of it in this fashion because we don’t think of paperwork as government work. But there are other forms of this that result in more tangible goods–such as private land developers who develop a subdivision being required, as a condition of the zoning permit to build houses, is required to build roads for the local government. (That’s how a lot of local roads in the United States were built, by the way: the government didn’t pay for them. Private builders paid for them as a condition of government permission to build.)
The second observation coupled with the first is an inextricable idea regardless of “MMT” or debt financing or Federal Reserve balance sheets. All the rest: measures of M1, indications of debt to GDP ratios, the amount paid to service the debt, CBO markups–all of this is built on top of the core fundamental principles (1) and (2) (with 3 thrown in) above.
Meaning, quite simply, our economy is divided into two parts:
The part that generates wealth.
The part that regulates the country.
Take away from the wealth generation part and you get less future wealth.
Screw up the part that regulates the country–either by subtracting too much from it or by the government deciding it has more important things to do than enforce laws–and we descend into chaos which hampers wealth generation.
At the very bottom of this ontological stack is this basic balancing act between wealth generation and government spending, which includes law enforcement.
And that’s true regardless of where you are in the world, or at what time you are in history.
Different governments and different cultures had different solutions to this problem–though notice we did not get the explosive rise in wealth we saw in the West until the enlightenment. A fact I personally would attribute to the emphasis during the enlightenment on individual liberty–because it permitted everyone to attempt to create wealth, rather than reserving wealth creation to an aristocratic few.
(Keep in mind that wealth creation is often tied intimately to knowledge and knowledge acquisition: to studying the universe and understanding how it works, then engineering better solutions to solve bigger problems.
Framed another way: we couldn’t have built the app economy–which accounts for billions in economic activity and which pays my own bills–back in the 1970’s. We simply didn’t know how.)
And no economic theory–no writings of philosophers like Marx or the Frankfurt school, no writings of Milton Friedman or John Keynes, no ideas from the Chicago School, the Austrian School, the Neo-Ricardians, no postulations about monetary theory or ramblings about “modern monetary theory”–can change this fundamental fact.
You cannot wish away the simple balance between private wealth creation and public consumption of that wealth for other purposes.
Worse, the more you spend on government spending, the fewer people are available to generate private wealth. And that stalls growth, regardless if your economic school of thought lives in denial of this fact.
You may as well wish the earth to be flat at this point.
And this balance act is what we see when we look at Europe, where government consumes a far greater percentage of GDP activity than the United States.
Something we can see by looking at the percentage of GDP collected as government revenue:
Norway collects 55% of GDP. France: 53%. Denmark: 51%. Greece: 47%. The average in the EU is 45%. Iceland: 42%.
The United States–and note this is the sum of state and federal revenues–is 29.5%.
It’s not that countries like Norway cannot compete against the United States. But it does mean Norway only has around 45% of its productive population to compete against the US’s 70% of our productive population.
(Which is one reason why Scandinavians who move to the United States do so much better than non-Scandinavians Americans, and much better than Scandinavians in Scandinavia. Scandinavia works, in general, because the people there are hard workers–harder workers on average than Americans.)
Now it’s not to deny you can’t go too far in the other direction; I noted as such above. “Screw up the part that regulates the country … and we descend into chaos which hampers wealth generation.”
In the other direction we have Venezuela: 4.1%, Yemen, 5.8%, Sudan, 7.4%. Not places I’d want to retire.
You can also have insufficient wealth from which to draw from, which then constrains the ability of the government to do a thing. Governments which try to emulate the United States do themselves a disservice–because they often don’t have the wealth we do to spend on over-regulating a population.
Framed another way, and this is made more apparent by the progressive tax system–your tax base is often drawn from the wealthiest of your population, regardless of where in the world you are. And that implies taxes which fund governments scale up disproportionately as income rises.
Meaning government is a luxury good–“a good for which spending increases more than proportional as income rises, so that expenditures on that good become a greater proportion of overall spending.” (Paraphrasing the definition from Wikipedia.)
We see this in places like India (19.7%) who seek to create all the government regulatory frameworks we see in the United States, but without the wealth to enforce them.
In general, if your philosophy does away with reality, it’s your philosophy that is broken, not reality.
And it’s important to chase down reality to see what is at the actual bottom of the ontological stack.
And in general, if your philosophy does away with basic fundamental principles–such as suggesting that a greater percentage of wealth generation should be converted into regulatory activity–it is up to **you** to explain why this is a good thing, and do so in a clear and accessable way without resorting to bullshit that denies reality–and not up to others to explain why these core principles are still core principles.
While all of this is obvious when we talk about things most of us can easily agree on–such as flat earthers requiring those of us who believe the earth is a rough spheroid to prove the earth is not flat–it becomes harder when people venture into things like “modern monetary theory,” only because the reality-violating consequences aren’t immediately apparent.
But the same principle holds: if your theory holds that we can spend as much money as the government can print without consequence, it is up to you to explain why siphoning off a greater percentage of the productive population into non-productive endevors will help with wealth creation. And how the government can ultimately avoid its debts when wealth creation fails to keep up with taxation and borrowing demands.
And if your theory claims wealth creation is unimportant, it is up to you to explain why wealth generation is unimportant and not up to the rest of the world to explain why wealth generation is important. And do so without descending into quasi-religious arguments such as those offered by Rousseau about the “natural state of man.”
Fuzzy little things that I find interesting. 