Bureaucratism

On Facebook, a friend says he’s tired of hearing conservatives claim the country is heading toward socialism and will ask the next person who makes the claim to support it with a dissertation.

This chart shows government spending as a percent of the economy has long been trending up to less than 10% in the early 1900’s to between 35% and 40% now.

But, even with the growing percent of the economy in the government sector, I may still not call that necessarily ‘moving toward socialism.’ I think a more appropriate term is bureaucratism.

Reinhart and Rogoff: Lesson in statistical terms

Advocates of government spending are enjoying the recent news that errors were discovered in an often quoted 2010 analysis by economists Reinhart and Rogoff that showed countries with debt at levels (resulting from high spending) greater than 90% of GDP had an average GDP growth rate of -0.2%, which was statistically lower than countries with lower debt levels.

Recent corrections show that these countries actually had averaged 2.2% growth, not -0.2%, which is not statistically different from countries with lower debt levels.

Critics have accused R&R’s analysis of spurring irresponsible austerity in government spending and may have prevented more beneficial government stimulus spending around the world.

But, wait. The corrected analysis shows that countries with lower debt had higher GDP growth rates ranging from 3.1% to 4.2%. Yep. In this data set, apparently 2.2% is not statistically different from 4.2%.

That doesn’t mean that the data shows that government spending helps (or hurts) GDP. It also doesn’t mean that ‘austerity’ hurts or helps.

To be clear…it means nothing. Government spending advocates are not wise to use the the corrected stats bolster their case.

Not statistically different means that from the size and sample of this set of data, it cannot be concluded with high confidence that the differences in GDP growth rates are caused by the differences in debt levels.  But, it doesn’t rule it out either.

If anything, the analysis still provides directional support that debt may hurt, rather than help.

Personally, I’m not a fan of GDP. I explain why herehere and here. Basically, it’s because GDP treats an expense like an income.

If tax cuts are spending, shouldn’t liberals want more tax cuts?

According to her comments, Nancy Pelosi considers tax cuts to be spending.

If Pelosi really believed this, shouldn’t she be as supportive of tax cuts as she is of real spending increases?

What’s the difference? Does she think tax cuts are irresponsible spending? If so, are there any other types of government spending she considers irresponsible?

My guess, the only stuff she finds irresponsible are changes that put more in the hands of citizens and less in the hands of government.

To seek rent or not?

Rent-seeking has been a popular topic on this blog over the past week. In the comments of this post, Mike M asked if a company seeking to sell its products to government is rent-seeking.

I replied, yes and asked him what he thought.

Here are excerpts from Mike M’s well-thought out follow-up:

 I think there is a difference between “selling” your product (goods or services) to the government (just like an other consumer) and convincing them to buy your product (as opposed to others) and seeking to have the government (as a third party biased referee rather than as a consumer of your product) afford you some privilege that gives you an advantage (such as subsidizing your product or taxing or regulating the competitor’s product).

 In the first case, as long as the government representative is truly acting for the benefit of the government, he should be seeking to make a trade at FMV.

I agree.

A “rent” is essentially an excess return above the “normal” return in a competitive economic market.

Typically, we use the term to imply that one has lobbied the government to obtain some special privilege – something that’s been going on since governments and economies have existed and is not a unique occurrence in any economic system (although that does not mean that it is meant to be a part of that system). Rent-seeking differs from profit-seeking, in which two parties seek to extract value by engaging in mutually beneficial transactions.

What is important for us to realize is that the costs spent on lobbying for these privilege eliminates some of the beneficiary’s gains for the privileges and results in an economic inefficiency, i.e. less output results from the same inputs. The cost of obtaining the rent represents a use of real resources and is a loss to the economy as a whole.

I agree. Also, I think it’s worth highlighting that the cost of obtaining the rent is the rent-seeking.

The next excerpt, however, starts to get at one reason — after going through a similar thought process as Mike — I erred on the side of yes.

Of course, this goes out the window if he’s your cousin or you’ve offered him a bribe and he buys your product at an inflated price, but I think that’s a different “crime” than rent-seeking.

Unfortunately, so much of government spending, even if it initially starts out on the up-and-up, devolves into rent-seeking. That’s how we end up with $800 government hammers and toilet seats. That’s how education spending per student triples in a few decades with nothing but shiny buildings (and wealthy builders) to show for it.

While the bribe is a different crime than rent-seeking, it is also rent-seeking, because it is spending resources to gain something without creating value.

Next, government spending comes from taxes. Taxes are not value creating transactions. Rather, they are redistributive. So, government vendors are ultimately lobbying government officials for a slice of their redistributive taxing power.

How is that different from lobbying government for its other powers like enacting a tariff on sugar or restricting competition in a market?

One objection I can imagine to my case is that some of the money spent by government does create wealth.

This is true. But, to say these things create value isn’t enough. They have to create net value relative to opportunity costs.

Roads are great, for example. I’m eagerly awaiting a new road being built near my home. It will be profitable for me, because it will shave many minutes on my commutes.

When I think of that new road creating value for me, I think only of the benefit — how much time I will save. But, I never know the cost.  If the local, state and Federal government (all are pitching in) said I could have that road or $100,000, I might decide to take the $100,000 and continue to put up with the extra minutes on my commute.

So, even when I see government spending that appears to have created some wealth for society, I don’t really know if it did relative to the alternative that could have been if someone had spent the resources more carefully.

What do you think, Mike?  What am I missing?

“I think we should…”

On Twitter, Jeff Brown asks:

If democrats/liberals like the idea of taxing everyone, do they themselves take any exemptions?

Of course they do.

I’ve had this discussion with folks who always think taxing more is a good idea.

My first frustration with them: They rarely acknowledge that government spending is a problem.

My second: They aren’t willing to voluntarily give more money to government and lead by example, which I take to be a revealed preference. It reveals that they don’t truly believe the government is the best place to put their marginal dollars. But, it cost them nothing to demand that others pay more to gain adoration.

I have heard a few claim that they aren’t “as aggressive as they could be” when it comes to claiming deductions. Bless their hearts. It’s for the greater good that they don’t bend the tax laws.

My third: They don’t think ahead. What do they think happens if tax rates are raised and that actually results in more tax revenue (which is a big if, at least over multiple years)?  Do they believe government, with its long history of irresponsible spending, is going to put that extra revenue toward cutting the deficit?

Government will find a way to spend that, too, and continue to run deficits.

Which, gets us back to my first frustration and demonstrates to me that these folks really don’t think much. Rather, they only parrot what sounds good.

It’s easy to spot these folks. They liberally use the phrase “I think we should…” to lead off the edicts they feel they are entitled to impose on the rest of us without ever giving due consideration to chance that they may just be wrong.

Getting cause and effect backwards

This post at The Pretense of Knowledge about the cognitive dissonance anti-consumerist supporters of Keynesian stimulus (i.e. college hippies), reminds me of an often misunderstood cause and effect in our economy.

The underlying belief of government stimulus spending is that spending itself is wealth.

But, the cause and effect go the other way. Spending does not cause wealth, wealth causes spending. 

Before my early ancestor, Unk, initiated the first trade with your early ancestor Puhg, Unk had to first create something that Puhg wanted. Likewise for Pugh.

So, while Unk got really good at gathering apples (investing), enough so that he had more than he needed at the moment (savings), Pugh was honing his skills catching fish (investing again), more than he needed. Unk trade a few of his extra apples, that he valued less, with Pugh for some fish, which he valued a bit more.  Likewise for Pugh.

In the trade value was created for both Unk and Pugh.

Now supporters of Keynesian stimulus will tell me that government stimulus “spending” is really “investment”, just like the investment Unk made in improving his apple gathering productivity. The government “investment” improves “our” productivity.

And, in some cases, that may be true. However, I noticed on a recent trip through several states that many of the shiniest and most architecturally adventurous new buildings, many adorned with art, happened to be government buildings.

I noticed some new private buildings, too. They were more conventional, less flashy. Maybe government knows something the private building owners don’t. Perhaps they know that groundbreaking architecture and public art adds to productivity. Certainly there are some private buildings like that as well.  But, I wondered how “we’ve” become more productive with such an elaborate edifice for a public works building, in one case.