🏢 Is Government Spending Effective?


Let us start by asserting that the money the
government holds is not its own. In general the government does not produce
anything, nor create wealth, nor even create jobs. If we are lucky, the government only reshuffles
capital from place to place. If we are not, which is the most common occurrence
by the way, it will waste some of the capital in the process. The government competes for capital with the
market. By the way, these remarks are not directed
at one particular government. It is the nature of taxes and government spending
in general. Our story begins with a discussion of the
quite-often-mentioned Laffer curve. The point of the Laffer curve is to maximize
governmental budget revenue. The economist Arthur Laffer has developed
it to illustrate the fact that when the government raises taxes up to a point its revenue rises
as well, but after that raising taxes actually causes revenue to fall, as citizens either
leave the country or try to avoid taxes by shifting their businesses to the informal
sector. True, the Laffer curve often serves as an
argument for tax cuts because, apparently, very high taxes can result in a decrease in
government revenue. But is increasing the government revenue,
and in consequence the government spending, really a good way to develop the economy and
satisfy people’s needs? In order to fund its spending, the government
must confiscate money from the private sector by means of taxation, or borrow the money
from the private sector by issuing bonds. Assuming that the government will pay back
for the bonds in the future, it will do so by raising future taxes. The third way the government can get money
is the so-called debt monetization. The government monetizes its debt directly
or indirectly by using central bank’s power to issue new money and then using this money
to finance the budget deficit. The government issues bonds that are purchased
indirectly or directly by the central bank for newly created money. In effect the deficit is being financed by
an increase in money supply. This means that the government acquires its
money at the expense of declining purchasing power of the money people hold. Some countries only use a combination of these
methods, but each of them does siphon out capital from its most productive use elsewhere
in the economy, and thus impoverishes society. No government expenditure can be made without
the private sector paying for it one way or the other. Moreover, the government can ignore economic
calculation and in fact more than often does so. Government needs not to be profitable; all
that it takes is for some bureaucrat to regard a given policy as needed by the public or
by himself as serving his own political interests. Consequently, the government can always crowd
out private capital from acquiring resources, because the private sector must mind its profits
as an indication of the economic effectiveness of its ventures. As for the government, it can always use its
power to tax the society for more money or make the public its creditor, and consequently
it can regard market prices as merely a meaningless formality. Why does the government allocate capital less
effectively than the market? The market is extremely complex. It is made up of millions of everyday decisions
made by people to meet their individual needs. These needs may vary depending on the individual,
but together all people are doing their best to use limited resources to improve their
situation. The whole economy is an intricate web of such
human actions and choices. These processes are coordinated at the macroeconomic
level by the division of labor and the system of market price formation. The individuals most effective in managing
their capital are rewarded with profits and can continue to do what they do best. At the other hand, those least effective are
discouraged by losses, thus forcing them to either seek out other activities, or to change
the way they use their resources. The very act of government raising its money
is thus tantamount to depriving individuals of their ability to choose a most preferred
use of their own resources. Even in a rare case when a government program
is actually profitable, such foregone individual opportunities actually constitute a loss for
society. To put it simply, profits could be larger
had people been given an opportunity to act freely. Market processes tend to allocate capital
in the most productive uses. On the other hand, the government misallocates
capital by wasting it in sectors previously bypassed by the market due to its expectations
of profit opportunities existing elsewhere. If such government expenditures were profitable,
private capital would be there already. Moreover, incentives and motives of market
actors and those of the government differ drastically. An entrepreneur investing his own money is
a risk-taker who counts on making profit later. He has no other option to receive profits
but to satisfy the needs of his clients, therefore improving their standard of living. If he makes a good choice, he enjoys the increased
profits. If he makes a wrong choice, he suffers losses
and loses some or all of his capital. That is why it is in the interest of the entrepreneurs
to invest their capital with care. The government, as we have mentioned, is not
driven by profit. It is driven by political goals. Often, instead of profit, the government sets
a goal such as a supposed public service, or job creation. The government can also engage in bribing
the public by use of redistributive measures. This is because the ultimate political goal
of government in a democracy is future reelection. When a government makes a mistake the society
suffers losses in its stead, being the government’s ultimate taxpayer and creditor. More than often, unprofitable projects are
allowed to exist, and continue to bleed public money. This is obviously because from the conception
their goal is a public service or job creation, not the money. Thus it is irrelevant whether such a project
continues to siphon money out of your pocket or not. Finally, two things about government spending
should be noted. First of all, all government spending at its
core is consumption. Investments are based on savings, and savings
are created by abstaining from present consumption in return for the increased productivity and
consumption in the future. The state has no savings, and its spending
serves present political purposes, so it cannot be treated as an investment. Second of all (and this is slightly unintuitive,
but true nevertheless), if we want our economy to grow rapidly, we need to try for a smaller,
rather than balanced budget. In most cases a $1 million budget with a 50%
deficit is much better than a balanced budget of $5 billion. Why? Because government spending is more important
than the way it is financed. Of course, a small balanced budget would be
an improvement. Government spending is always a cost for the
society. Sometimes a society may agree, that some of
this cost is necessary and we should pay such a price for something important. Reasonable defense expenditures seems to be
such an example. However, you should never consider government
spending as an investment. True, the market is not perfect, and people
sometimes take wrong turns. The market, however, tends to quickly correct
bad choices and eliminate bad investments. What is more, instead of everyone, only the
individual who made the mistakes bears the brunt for them. Unfortunately, it is not the same with government,
as its revenues are effectively unlimited because it always has the 3 methods of raising
funds we have mentioned earlier. The government, unlike the private sector,
is oblivious to profit and loss incentives. Thusly, it should be obvious that the private
sector will always be more effective than the public sector in managing capital. If we want our needs to be met with utmost
effectiveness, we need to stop pushing the government to crowd out as much capital from
productive undertakings as possible, and start to do the opposite! the opposite!

Maurice Vega

12 Responses

  1. Your video content is good but the voice is terrible. In just $10, you can have good voice over from Fiverr so similar sites. Please replace it with women voice, it will be excellent video then. Sorry, you might feel bad, but these things are needed for good explanatory videos. Please replace voice for all videos. Just try for one video and feel the difference.

  2. great video, the only thing I'd disagree with is that you spent the whole video explaining why the free market is superior, but then said we should have defense expenditure, when clearly defense follows the same economic concepts and could be done more privately.

  3. This is a terribly misguided video….capitalism is a system built of of personal gain which isn’t always good for the collective. That’s why government is necessary. It can do good for everyone and not just the individual. It is a place where people willingly follow rules so that all benefit. People have a habit of not informing themselves enough and companies have an incentive to misguide consumers to do things that harm them in the short and long term. Capitalism is a system that encourages blissful ignorance so that the consumer spends as much as possible. I am a capitalist but government is tragically necessary.

  4. Is the market able to provide good long term allocations of resources?
    How can the market preserve resources for generations and centuries if people are at maximum interested in preserving them for their life time? People make really irrational decisions, especially long term ones.
    Saving for retirement might be a good idea but many simply do not care because it seems so far away.
    Can you still assure me that the market will always make better decisions than the government even when market players are extremely irrational?

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