Filling in Some Economic Gaps

I’m not much of an economist. This week, I’ve been looking at articles about whether or not government spending and the deficit hurt the economy. To be honest, I didn’t understand them that much. A lot of the articles (even the popular ones) seem to assume that everybody has a common-sense, “big picture” understanding of how the economy works, and that’s not exactly true with me. My Asperger’s tends to make me focus on the trees rather than the forest, and, when authors leave the trees out, then I am lost. Of course, I’m not saying that having Asperger’s and being an economist are irreconcilable. There is a Nobel prize-winning economist who has the syndrome, after all.

I spend time (probably more than I should) on a Christian dating site, which has a variety of forums. I’ve learned a lot from it. From the Bible Study and Theology Forum, I’ve read the perspectives of different denominations. I can now tell you (roughly speaking) the various viewpoints on the rapture and the justifications given for each of them. As I said yesterday, the Prayer Form gives me clear opportunities to pray for people, something that church doesn’t really do for me (at least not as well).

Anyway, as I was struggling with the economics articles, I posted a question on the News and Current Events Forum. I asked why the budget deficit is bad for the economy. I told all the potential responders to expect some obvious questions from yours truly.

Some of the replies did not make sense to me because they were overly abstract and used technical economic terms. But some of them did make sense. Here’s what I learned:

The deficit is bad for this reason: when the government borrows money, it is leaving less money for investment and purchases in the private sector. Incidentally, this is also true when the government spends more money. There is only so much money to go around. If more is in the government’s hands (through taxes, the deficit, and government spending), then less is in the possession of the private sector. When the Federal Reserve prints more money to address this problem, the result is inflation, as Ron Paul has repeatedly said. Why? Because when businesses know that more money is out there, they will raise their prices to get more of it.

The best thing for the economy is for more money to be in the private sector, not the government. Why? One reason that comes to my mind is that the government depends on the private sector. The government gets money through taxes. It is not self-supporting, but parasitic.

Often, the Democratic solution to unemployment (going back to FDR) is for the government to create more jobs. But the money for those jobs will have to come from the private sector, through taxes or borrowing. The private sector, by contrast, is not exactly parasitic, since people pay their own money to receive a service, resulting in jobs. Now that is a self-supporting system! The company gets paid, the person receives a service, and jobs are created through the entire process. There’s no ripping off of another sector to create jobs. Everyone’s happy, and, when there is unhappiness, people can shop elsewhere (if the government doesn’t inhibit competition). Why not stimulate the creation of jobs in the private sector rather than creating more parasitic jobs for the government?

The same applies to all this push for federally-funded energy alternatives. Sure, that will create jobs, but the jobs would be parasitic because they’d need the support of the government. The support won’t be coming from the consumer, for there’s not a great deal of demand for alternative energy right now (since people can use oil). If there were, then the private sector would be investing in it.

Some may argue that government jobs are not parasitic because they create services (e.g., roads, schools) that can help the economy in the long run. Businesses prosper when there are good roads and an educated work force. If I’m not mistaken, this is the type of deficit spending that John Maynard Keynes advocated–the kind that yields beneficial returns for the economy. Liberals point out to me that the deficit we’ve accumulated from the Iraq War is different, since the money is going down a hole in that case.

My response to that will not surprise my readers. I feel that a lot of domestic government spending is going down a hole. Government-funded schools do not necessarily produce a better educated work force, for example. In fact, the lack of competition in public education seems to create the opposite effect. So one can legitimately ask, “What beneficial returns?”

I realize that this post may not be my clearest, since I’m thinking out loud. There are also many economic rules that I don’t understand. Why does the budget deficit lead to higher interest rates? It has something to do with selling bonds, but what? I read that the budget deficit means that Americans save less. How so? Just because the government doesn’t balance its checkbook, that shouldn’t mean that I can’t. Maybe there are some good books or articles that can fill in the gaps.

About jamesbradfordpate

My name is James Pate. This blog is about my journey. I read books. I watch movies and TV shows. I go to church. I try to find meaning. And, when I can’t do that, I just talk about stuff that I find interesting. I have degrees in fields of religious studies. I have an M.Phil. in the History of Biblical Interpretation from Hebrew Union College in Cincinnati, Ohio. I also have an M.A. in Hebrew Bible from Jewish Theological Seminary, an M.Div. from Harvard Divinity School, and a B.A. from DePauw University.
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7 Responses to Filling in Some Economic Gaps

  1. Anonymous says:

    When it comes to government spending, the key distinction is to which sector the money is funneled. Some sectors have historically multiplied the money (e.g. R & D) while others have not (e.g. buying fuel in Iraq). Whether or not the government spends it is less important than whom it spends it on.

    Probably the best way to introduce yourself to economics would be to read the Economist. It is interesting and sober. Nearly always.

    Jake
    PS I used to work for a large Investment Banks. The response you got is incorrect and relies on P. Volker’s failed policy of yesteryear.

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  2. James Pate says:

    The Economist is online, so that’s good, considering my budget is tight right now.

    By the response I got, do you mean the idea that printing more money means inflation? I know that Volker and Reagan both tried to reduce inflation by tightening the currency.

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  3. Anonymous says:

    What did you think about Greenspan’s prediction today about a recession being, at this point, a 50/50 chance? Do you think he has more influence than Bernanke?

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  4. Anonymous says:

    Whew–reading Economist online. That would be a tremendous task indeed! I’ve been able to finagle several free subscriptions via CC or FF points.

    I generally meant a limited the money supply, though not simply to resist inflation, but as a general philosophy. It sounded like that’s what someone told you, and without appreciating credit derivatives that line of thinking will ultimately lead you down the wrong path.

    In many ways I generally lean towards a freer market, but I’d frame my perspective differently.

    I tend to think we are in a recession, though not simply because of the housing market. The emerging markets have overheated and seem to lack the infastructure to maintain themselves.

    -Jake

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  5. James Pate says:

    Greenspan may have more influence. Overall, it seems that a lot of corporations in general are bracing for a recession (at least from what I’ve been reading on Yahoo News).

    On tightening the money supply: Are you saying that this wouldn’t necessarily reduce inflation because of credit, which makes money supply irrelevant?

    You said earlier that Volker’s policies failed, but they did reduce inflation in the early 80’s, didn’t they?

    I’m interested in hearing more about the emerging markets overheating and lacking infrastructure. Do you mean that new businesses (stimulated through the tax cuts) are doing well, but they lack things in place to keep doing well?

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  6. Anonymous says:

    You asked an interesting question about my doubts about emerging markets.

    By emerging markets EM, I mean regions like BRIC etc… rather than sectors.

    If I had to boil down my reasons into 2 palatable bites I would say:

    1). Several EM’s lack the intellectual infastructure to maintain several large companies. There’s simply a dearth of experienced leadership. In China, for example, a high level HR reps make more than they do in the US without adjusting for purchasing-power. High level positions requiring more advanced business savvy are at too high a premium to fully insulate their business.

    2. I tend to think that economies on a micro or macro level run in cycles. People always dispute this and argue that new checks and balances will prevent the next cycle, but I have yet to see a bubble burst. 10% growth in China and 20% in Macau is unsustainable.

    I’ve been wathcing several companies closely for the last few months that I think are crucial litmus tests to my contrarian nature: C, JPM, and MER. Blood in the streets.

    -Jake

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  7. James Pate says:

    I had to look up some of those terms (emerging markets, BRIC). So these are companies in foreign countries. Well, they may not have much expertise running them now, but perhaps they need some time to get used to capitalism. Of couse, on the other hand, we’ve been trading with China for who knows how long (at least since the early 90s).

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