Consumer and government spending: short term v. middle term

In the short term, we need the stimulus. In the middle term, austerity is in order.

Over the medium term, U.S. households need to earn more and spend less to clean up their balance sheets and get ready for retirement, while governments need more revenues – over and above what will come naturally as economic growth resumes – and/or reduced expenditures to get their fiscal affairs in order. So I’m happy to see stories like this one, both reporting and encouraging what may be a trend toward less a less materialistic lifestyle.

In the short term, the imperatives are the opposite. Higher consumer and governmental spending are needed to restore the economy to full employment. Even if you think that it would be a good idea, on economic and spiritual grounds, to stop celebrating the Incarnation with an annual flurry of luxury-goods purchases, you want this year to have been a “good” Christmas for retailers. Even deficit hawks, if they’re sane, don’t want a smaller deficit for the current fiscal year.

Both politicians and journalists face a challenge in communicating this set of mixed messages. Good luck to them and to the Detroit Lions.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

5 thoughts on “Consumer and government spending: short term v. middle term”

  1. I find conversations about government spending extremely confusing. Notwithstanding that I'm a mathematician by education, there's something fundamental about governments and money that I just don't get. That is: the government is the source of the currency, so it seems absurd that they could get richer by possessing more of it, or poorer by spending it. Leaving aside anyone outside of the United States, what value does the dollar really have other than it's what the US Government insists we use to pay our taxes?

    Suppose for the purposes of a thought experiment that our monetary system were launching tonight at midnight. The government would have to give the first dollar to someone willing to take it, since they are the source of dollars and no one else would have any of them. In other words, the government would *have* to spend before it had any revenue, since taxes are paid in dollars–and it starts out with all of them. So when the dollars come back in the form of taxes, what use can the government possibly have for them? It seems that they might as well put them into an incinerator, since the only value to the government of using them again is to avoid the trivial "cost" (also, bizarrely, paid in dollars) of printing new ones. As long as enough dollars fall back out of the active economy through savings and taxes to avoid having more dollars around than are needed to purchase every available good and service, why should anyone care how many dollars the government creates and spends?

    Obviously, I understand how I as an individual can spend money that I don't have and thereby get into trouble; if I overdraw my account, the bank won't honor my check. Likewise, I can see how the individual states could get in trouble. But in the Federal Government's case, such a check can't possibly bounce because it would be equivalent to simply creating more dollars, which is has the power to do.

    Other than potentially causing inflation, why does a US gov't deficit matter? How is the next dollar created different than the first dollar created in terms of the government's ability to create money and spend it?

  2. Christopher, try Wikipedia: Govt. Debt Risk. A lot of the world is hurting financially in the same way as we are, so few economists buy the arguments that the U.S. is going to default, fall into hyperinflation, lose our credit rating, lose the dollar as default reserve currency, etc. due to our current debt levels. Growth (and legislation) can help the deficit problem, but the U.S. needs employment ASAP. Also might be worth a read: Fractional-Reserve Banking.

  3. A dollar's value is based upon the goods that it can be exchanged for. Yes the government could just print money to pay off its debts but that leads to inflation as more dollars are circulated and is a form of tax on the populace as inflation erodes savings (well some savings). So it isn't a pain free way to get out of debt .

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