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May 28, 2012

Street Light Economics

It is dark. Jim is looking around under a streetlight.

Frank:  What are you looking for?
Jim:    I lost my keys up the street a way.

Frank:  Why are you looking for them here?
Jim:    The light is better here.

This is a funny comment on human nature. The tragedy is that this type of thinking rules our political and policy world. It is the problem of the seen and unseen. Politicians and economists report in official tones about their measurement of what is under the light, when there is a big, complicated world in the darkness. They should know better

Prosperity and Vacations

Suppose that a Prof  (Professor of Economics) studies past spending on vacation travel and lodging, and finds that periods of higher income are definitely associated with higher spending on vacations. The Prof has assembled the data with statistical precision.

So, the Prof proposes to raise everyone's income and end a recession by requiring that people use their savings to spend more on vacations.

He says that this will increase GDP directly (Gross Domestic Production), and vacation spending was associated in the past with even larger gains in personal income. He calls this the "Vacation Spending Multiplier". Everyone will become wealthier when they buy more vacations.

That advice would be crazy.

A cushion of savings gives people some flexibility in uncertain times when they might lose their own job. Yes, spending more on vacations would temporarily employ more people. But, at the end of the forced spending, those other people would again lose their jobs, and the buyers would have spent their savings. They would only have some nice memories.

The Prof has completely confused cause and effect. People buy more vacations when their income increases. More vacations is not the key to building the wealth of society.

Prosperity and Government Spending

Instead, the Prof  (one of many government economists) reports that past periods of increasing personal income highly associate with increasing GDP and higher government spending. The Prof has assembled the data with statistical precision.

So, the Prof proposes to raise everyone's income and end this recession through massive government borrowing applied to massively higher spending.

Not only does this increase GDP directly, but it has associated in the past with even larger gains in personal income. The Prof calls this the "Government Spending Multiplier".

The Prof says that everyone will become wealthier when they indirectly buy more of anything through the government.

That policy is crazy. That is our current policy.

Yes, spending more on government bureaucracies, planning meetings in Hawaii, and filing cabinets has temporarily employed more people. But, at the end of the forced spending, those other people have again lost their jobs, and the people of our country miss their savings. They don't even get a nice memory of a vacation.

The Other Guy

The public is truly doing the buying, because it will have to pay back the government loans from the economy created from that extra spending. Additional sidewalks, filing cabinets, and regulations do not support producing more things that support people's lives.

You may think that the other guy, the rich guy, is going to pay back the loans, so why worry?

  • The amounts are so large that the politicians are coming after you through innovative taxes.
  • Even if the rich pay an outsized portion, that comes from money that they would have invested in things that produce more opportunities for jobs. They are only trying to make a profit, but they will want to hire you along the way. More businesses produce a long-lasting need for more workers and managers.

    Government borrowing has a temporary effect and wastes resources. It is unsustainable at the current, massive levels.

  • The government may convince the rich that they can't gain anything personally from investing. So, they will stop, and go on vacation. OK for them, bad for you.


I might forgive Jim above for looking only under the light. He might figure that he has no chance of finding his keys in the dark. He is an amateur.

But, people who call themselves economists claim to have studied the situation. They claim to be experts about the dark. They should know the probability of finding those keys. They should be expert at presenting just what is seen and unseen, known and unknown.

Instead, they crunch statistics about past events, ignore the uncertainties, mash together the complexities into simplistic measures such as GDP itself, and recommend policy based on the numeric results of untested (and often unverifiable) "models". Not all economists, but almost all who advise the government.

A Choice

We mistakenly trust in supposed experts who bask in the precision of their statistics. Yet, they measure only what is under the light, and then recommend using government force to guide the public through the darkness.

We are going to face a world-wide breakdown caused by governments printing money, borrowing wealth, and wasting it. Immoral and ignorant politicians have failed to provide the utopia promised to a gullible public. The outcome will depend on what the populace comes to believe.

Some politicans will say that this is another stage in the collapse of Capitalism, unable to be restrained by a caring government.

Or, people may see that government was in control, printed the money, borrowed the wealth, and failed miserably. Maybe, as after WWII, the people will reject goverment plans and promises and cut the power of government. Another prosperous period of growth and power like the 50's and 60's would follow.

- -
Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.

[edited] What happened in 1945 at the end of WWII? FDR was convinced the only way to employ the 12 million returning soldiers was another New Deal program, but he died before he could impose his plan. The new President Truman proposed it, along with national healthcare.

Both the Congress and Senate had Democratic majorities. They said "No" to the whole New Deal revival:  no federal program for health care, no full-employment act, only limited federal housing, and no increase in minimum wage or Social Security benefits.

Instead, Congress reduced taxes across the board. Top marginal corporate tax rates effectively went from 90% to 38% after 1945.

By the late 1940s, a revived economy was generating more annual federal revenue than the US had received during the higher tax rates of the war years. Price controls ended in late 1946. The US began running budget surpluses.

Unemployment had remained double-digit throughout the whole New Deal. One year after the end of New Deal policies and the return of economic freedom, it was under 4%,  despite the return of a huge number of soldiers.

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