RALEIGH – From Brussels and London to Washington and Raleigh – and even within the county commissions and city councils of North Carolina – politicians are debating about how governments should respond to persistent economic woes.
There are far more than two identifiable opinions on the subject, I’ll grant you, but they can be grouped into two general categories. If you want to wax philosophical, you can affix a variety of labels to the two teams: Keynesians vs. free-marketeers, authoritarians vs. libertarians, centralizers vs. federalists, Left vs. Right.
A simpler way to express the political disagreement would be to describe the government fiscal policies they prefer: Spend More vs. Spend Less. Being the cheeky champion of advertising that I am, however, I’ll suggest slightly different labels: Tastes Great vs. Less Filling.
In general, the Tastes Great team believes that recessions occur when consumers stop buying enough goods and services to sustain economic production. Whatever valid reasons individual consumers might have for paying down debt and becoming thriftier, the macro effect on the economy is seen as unwelcome.
The Tastes Great team concludes that more government expenditures are needed to prop up aggregate demand, keeping current workers employed and inducing new businesses to set up shop. Furthermore, they tend to believe that increasing government budgets boosts long-term economic growth anyway, because only government officials have the requisite knowledge and incentives to invest in education (human capital), infrastructure (physical capital), science (intellectual capital), and other assets that pay future returns.
The tasty policy brew that advances both their short-run belief in macroeconomic tinkering and their long-run belief in government investment is a mix of higher taxes, higher spending, and higher debt. Because they believe that the immediate economic problem is inadequate private consumption, they must inevitably believe that there is too much private savings and investment (remember that consumption + investment = total income).
Instead of leaving income in private hands, where it might just be saved, they favor taxing and redistributing it to lower-income households, who are more likely to spend than save. To offset the resulting loss of private investment, they favor public investment – i.e. more government spending.
In general, the Less Filling team argues that terms like “aggregate demand” obscure more than they reveal. This team believes that recessions occur when production and consumption get misaligned. That is, the problem isn’t so much a lack of consumer demand as it is a surplus of particular goods that consumers no longer want and a deficit of particular goods (including investments and capital goods) that they’d rather buy. Businesses must draw down inventories of less-popular goods and retool to produce more-popular goods. As a result, some plants, stores, and divisions are closed. Some employees and vendors are displaced.
Each economic bust reflects a supply-demand disconnect that originated during the prior boom. Most recently, government tax and regulatory policies favored spending on housing over spending on other capital goods, creating an artificial bubble of demand for new homes that eventually, inevitably, popped.
The best thing policymakers can do to shorten the length and depth of a recession, says the Less Filling crowd, is to avoid blocking the necessary adjustments. Allow prices and wages to adjust to reality. Don’t make the adjustments more expensive by raising taxes, erecting trade barriers, bailing out failed enterprises, or increasing the subsidy for remaining unemployed.
As for long-term growth, the Less Filling crowd agrees that investment in human, physical, intellectual, and other capital is valuable – but disagrees that government monopolies should dominate such investment. Before collecting more taxes or issuing more debt to finance still more government spending, they prefer to reform existing education and infrastructure programs to increase their productivity – by encouraging competition and innovation, reducing cross-subsidies that distort economic decisions, and eliminating low-priority spending that does little more than feather the nest of well-represented special interests.
Yet another way to think about the difference is this: both teams know that government can only spend to the extent that it reduces private spending, either through raising taxes or issuing debt. But the Tastes Great team thinks that it can trick the general public out of a recession by “priming the pump” with government stimulus apparently concocted out of thin air.
The other team thinks that such gimmicks may taste great politically, but are less economically filling than letting those who earn income spend it as they see fit.
Hood is president of the John Locke Foundation.