Spending, “austerity,” and starting to grow again

 AFTER YESTERDAY’S FISKING OF David Cunliffe’s speech launching his bid to be this generation’s Jim Anderton, I was asked a question about “spending.”

It was a good question. At least, it demanded a good answer.

Cunliffe had written:

CUNLIFFE: When you start closing down your government services and firing your workers, those people have no money to spend. Because they have no money to spend, the local businesses suffer. So they start firing staff. And so the economy goes into deep recession, with no easy way out.

This is a common Keynesian notion. It’s also complete bollocks.

In a quick response to his argument I said this:

PC: Spending doesn’t stop when you start closing down government services. It just changes its form: the money that was taken to buy government waste and pay back government’s debt is left in the producers’ hands and spent instead on private production and capital formation. So instead of spending it on arseholes to play with paperclips, the money can be spent instead on new capital goods—on production instead of consumption—on industry not on bureaucracy.
This is what actually produces wealth (as Adam Smith could teach Cunliffe) and why cutting government leads not to recession, but to prosperity.

Misunderstanding my point, my interlocutor responded thus:

Spending doesn’t stop when you close down your government services? I sure hope that it does! Because we're borrowing what - a couple of billion every week to flush that money straight down the toilet of benefits! [I believe the figure is $300 million a week, at the last count!] …
That's NZ's problem in a nutshell: spending that NZ cannot afford, taxing high-value Kiwis at a marginal rate of 60%+, and still borrowing massively to plug the "shortfall" of funds that are immediately flushed down the toilet.
NZ must stop borrowing!
NZ must stop taxing!
and above all - NZ must stop spending!

I agree with my questioner.  Government borrowing does need to stop. Government spending does need to stop. But my point is that this does not mean spending in the economy stops too.

LET’S ASSUME THAT INSTEAD of borrowing to shore up the government’s balance sheet (which these days means shoring up the balance sheets of banks stupid enough to lend to governments) that government spending were instead to drop by one billion dollars per year. (We wish!) 

Does that mean that there are now one billion fewer dollars being spent in the economy?  No, it doesn’t.

What Cunliffe and Keynes assume is that government spending just falls out of the air like manna from heaven, expending its blessings in similar manner. Their ignorance is brilliantly summed up by Dave Barry:

See, when the Government spends money, it creates jobs; whereas when the money is left in the hands of Taxpayers, God only knows what they do with it. Bake it into pies, probably. Anything to avoid creating jobs.

You see, government itself produces nothing. It only consumes. So every dollar government spends must first have been taken from someone else. From someone else. From taxpayers.  Whether the govt spending comes from taxes, inflation or borrowing, their spending sources is you, me, your uncle, your aunt, your friendly local industrialist and your friendly local entrepreneur.

So if government is not spending one billion dollars that was being previously being taken from you, me, your uncle, your aunt, your friendly local industrialist and your friendly local entrepreneur, then you, me, your uncle, your aunt, your friendly local industrialist and your friendly local entrepreneur will now be spending it instead!

You see my point?

Now, if you, me, your uncle and your aunt carry on spending that money that’s now in our pockets, then to that extent the level of consumer spending is the same. (Yes, Virginia, all government spending is consumer spending.)

But if your friendly local industrialists and entrepreneurs start spending the money that is now back in their pockets, then it’s more likely they’re going to spend it on new investment and on new factories, on new capital goods (which raises wages) instead of consumer goods (which depletes them). On new production (which grows the wealth) instead of consumption, which consumes it. (Yes, Virginia, that’s why it’s called consumption).

So spending is not one billion dollars less, but in the first year it will be almost precisely the same—yet in the second and subsequent years this spending will be increased by virtue of the new productivity that has now entered the economy.

And jobs? The number of jobs in the economy will be at least the same, because the same amount of money is being spent—but in this and subsequent years wages would grow higher as the amount of capital goods available increases.

This is a good thing. A very good thing. This is in fact how economies grow: by investing and reinvesting in new capital goods and new innovation, which raises and continues to raise real wealth and wages.

And instead of an economy crammed full of bureaucrats and arseholes with clipboards, we move towards one crammed full of producers—and with people who earn those rising wages.

Now, it might be objected that even if you and I don’t bake it into pies, we might—just might—put our money into savings instead of into our local Harvey Norman. Is this a bad thing? Far from it: because consumption is not the engine of economic growth, never was; and in fact 0ur pool of real savings provides the fertiliser for producers who borrow it. Because saving doesn’t subtract from spending it just changes its form. The more we save, the bigger the pool of real savings from which producers can borrow to expand their production.

The more we save, the more we grow. That’s a good thing, right? In the current environment, it’s the most likely way we’re ever going to get ourselves out of this hole.

AND WHAT ABOUT AUSTERITY? Well, let me say a final word about “austerity.”

Consider that governments around the world have borrowed and spent around 100 trillion dollars in the last decade.

100 trillion dollars!

And they may as well have gone ahead and baked it into pies for all the good it would have done. Unless you’re Gerry Brownlee, pies would have done far less damage.  (Just imagine what genuine producers could have done with 100 trillion dollars!)

So governments have borrowed like all hell in a five-year-long fit of foolishness, and apart from a very few examples (Estonia, Sweden) none have actually cut their spending at all. None have given it back to taxpayers. Some have slowed down the growth in their spending. (Which muppets like Cunliffe call “austerity.”) All are in thrall to the wreckless irresponsibility sponsored by John Maynard Keynes, endorsed by David Cunliffe et al, and demanded by voters who finally discovered how easily (they thought) they could vote themselves benefits from the public treasury.

That so many of them are now in the streets protesting the bailouts of the very banks to whom their governments are in hock is perhaps the final irony.

And when you understand that it is to the local variety of these know-nothings that the would-be next Labour Party finance minister is making his pitch, you will begin to understand just how nasty the next decade in this country might be.