Why Don’t Citizens Understand the Economics of Government Spending?

I have long wondered why the simple economics of government spending and the building of an economy are n0t understood by most of the population.  But then, I also wonder why some people don’t like fine chocolate, given its wonderful flavor and texture.  It seems so obvious.

We could blame the existing public school system, of course, but that’s too obvious and easy a target these days.  It barely turns-out people qualified to flip burgers, much less understand the government budget, basic history and economics.  Judging from the number and range of college remedial courses offered these days we should just take 6th graders and send them straight to college as that appears to be about the average level of a 12th grade graduate.

The disaster of the public school system aside, let’s turn back to government spending and economics.  It seems even most folks that graduated in the 1950s and 60s don’t even get the basics, so maybe it’s not just the public school system to blame.   Maybe, it’s the Propaganda/Media machine that seems to churn-out idiot talking heads faster than Hershey’s turns out Kisses.  Virtually none of them seem to understand basic Economics 101.

For example, the average person seems to have no idea of the definition of the Velocity of Money.  They can tell one all about where to find a mortgage at 3%, a zero, zero, zero loan with a score of 720.  However, they have no idea of how a mortgage is created from thin air with no money actually lent from the bank who “originated” it.

Even worse, for our discussion, is the near complete lack of understanding of the Money MultiplierOpportunity Cost, Marginal Utility or my personal favorites the Glazier’s Fallacy and Comparative Advantage.  If folks just took very few hours out of a single month to understand what those terms actually mean, the current idiotic “debate” going on in Congress, the media and the public over the federal budget and the dreaded “Shutdown,” would not be happening and likely would have never happened.

Politicians and Pundits would never be allowed to use the term “investment” when discussing government spending.  Or, for that matter, any of the next 10 oxymorons politicians pose when referring to what they euphemistically call “the economy.”  They get away with because most people have no idea how stupid it is to tie the idea of  “investment” to “government spending,” with even a single silk thread.   If the “Rahn Curve” is correct (and all evidence says it is) it all boils down to this: “A little bit of government spending (at all levels) does a lot of good.  A lot of government spending does little good.”  In fact, too much spending will always end in an economy entirely insolvent and bankrupt.   That seems kind of like a “DUH!” statement but then no one seems to get it, either.

History teaches that when total government spending exceeds 55% of GDP no country’s economic system can long survive.  Ours is approaching 50% total.

Basically, the idea is that the more truly productive a wealth-creating venture is, the higher the “multiplier effect” that creates growth in the economy.  Non-productive ventures create slower or negative growth if their proportion of the economy is too great.   Most all of government beyond absolutely essential functions is, by definition, non-productive.

Without settling on any one study I’ll just use the ranges the various studies have generated.  When a dollar is taxed or borrowed out of the economy, to fund a government venture, the average return on the dollar is $0.60-$1.70.  Welfare spending is probably towards the bottom of the range and high-tech R&D by government near the top.   Welfare disbursed on borrowed money is even worse for the economy, not even touching on the negative social and cultural effects.  So welfare and pure benefits transfers are economic losers and NASA a modest winner for the economic system.  In general, government spending is a purely consumptive exercise.  That’s why it is required to be kept to a minimum.

In contrast, the private sector economy shows a much greater return.  Depending on the sector, the typical return for a dollar kept in the private economy and actually invested returns from $3-5.  In some sectors, like high tech, the reurn can be as high as $6-7.  That means that the combination of all private-sector economic factors creates a $2-4 opportunity cost for taxing that dollar out of the economy for government vs leaving it there for private investment.

In direct terms then,  the seeming magic of compounded growth like compounded interest, costs the overall economy an immense sum of wealth that is never recovered.  If one considers the additional $trillions that government has spent in the last 40 years that never should have been allowed, we are paupers in comparison.  It’s easy to estimate a U.S. GDP at $40-45 trillion in 2013 rather than the paltry $14 trillion it will barely achieve.  Can anyone even imagine all the possibilities the United States could have achieved if we’d simply kept government spending under control and never racked up $17 trillion in debt?  This includes the elimination of almost all social welfare (and corporate), dependency, subsistence, subsidy and the like.

Any government-set minimum wage would be a joke compared to the private sector entry-level wages delivered in a $45 trillion economy.  Private charity and minimum government supplemental-aid programs would be the norm to provide any “safety net” that fell outside of the private sector.  It is inestimable the amount of social and cultural damage that has been wreaked on the people by constricting economic growth through government spending.  It is the maximum working of The Glaziers Fallacy.

We would never be watching the stupid spectacle taking place in Congress as this is being written.  Any T-bills that would ever be issued, if any, would be truly the gold standard of sovereign debt.  Rather, very soon, we’re going to watch the deterioration of the status of our sovereign debt to junk and the dollar to erode below 50% of the world’s reserve currency.   At that point, the rout will be on.

And the American public has no one to blame but themselves.




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