Since no one else that I know of has said this, I will make my comment let the objections come in and then address them. I am by no means suggesting that this analogy is iron clad.
Lots of people think that if the government spends money hiring folks this will only crowd out other spending from the private sector and do nothing to bring down unemployment.
I would ask them: do you also believe that is true of Apple or Google or any other private firm?
If not, then why are they different? Lets discuss.
Well obviously Google and Apple are private firms. Government and private firms are not the same. However, that’s not enough.
Cardinals are not Robins, but they both lay eggs, fly and engage in other bird-like activities. Which is to say that we have to be explicit about how these two things are different and why that difference matters.
One guess might be the difference is that government must tax or borrow and this uses up real resources. Yet, in terms of resource tracking private firms are are also subject to an adding up constraint. This is different from value-add which I will get to.
The money to pay the workers has to come from somewhere. The money to buy the capital has to come from somewhere. Even if it comes out of Apple’s cash hoard that represents a decline in loanable funds. Ironically, much of it represents a decline in the demand for T-bills, which is basically the dual of the increase in the supply of T-bills that happens when the government borrows.
Why isn’t it the case that Apple or Google employing resources simply reduces the amount available to others. And if so, why do we think that would bring down the unemployment rate?
As a short way out I would suggest that at full employment we don’t believe that Apple or Google spending money would bring down the unemployment rate. We think they would, indeed, take away resources from other uses and we believe that in doing so they would bid up the price of those resources. That’s part of why we think full employment and wage increases go together.
What I think we believe – and this gets to the Cardinal/Robin thing – is that Google or Apple would only be able to do this if they were moving resources to better uses. That is, yes they are crowding out other types of economic activity but they are doing so in favor of a superior activities, types of activity that produce goods of greater social value.
Because the government faces no market test there is no assurance that when the government pulls resources out of society that it is doing it for purposes with greater social value. It could be doing it for “pork projects” or more generally it could just be making an honest mistake. Policy makers really thought the universal combobulator was a good idea but they were wrong and since there is no market test, we will never know.
However, when we are away from full employment then it either seems that more spending on the part of private firms could not reduce unemployment or more spending by government could.
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Friday ~ June 10th, 2011 at 3:36 pm
Gepap
When did markets become the single measure of “societal value”?
And in a Democracy, governments face the constraint of elections, in which citizens pass judgement on the value of a government’s policies – is this not a “market” action?
Friday ~ June 10th, 2011 at 4:23 pm
AirmanSpryShark
Elections are equivalent to a choice of bundled goods & services provided by a duopoly. Inasmuch as it is a ‘market’, it’s far more riddled with ‘market’ failures than the actual market.
Friday ~ June 10th, 2011 at 4:51 pm
Wonks Anonymous
Yes, private sector spending causes crowding out. We see that in land prices where the fact that other people want to live there and are willing to pay for it means you can’t.
Gepap, I did a ctrl+F for “societal value”, and there was nobody writing that phrase before you to quote. Not sure what you’re responding to. Democracy is a decision algorithm, but not all such are markets. Markets involve buying and selling.
AirmanSpryShark, they are not equivalent. I can decline to buy from a monopoly, and I would if the service had a negative value (like getting kicked in the shins). I can’t decline to purchase laws I disagree with, even if I don’t vote. The disjunction between private choices and outcomes is what fuel’s Bryan Caplan’s theory of “rationally irrational” voters.
Saturday ~ June 11th, 2011 at 4:18 pm
Ryan Vann
Wonks is spot on here.
Friday ~ June 10th, 2011 at 5:54 pm
Hyena
Wait. The market test is irrelevant here. If Google spends $50 billion, the market tests the result and it either makes money or does not, allowing us to know how good it was. If the government does the same, there’s no difference but in whether we know. The market test is irrelevant to one-off projects of any kind.
Saturday ~ June 11th, 2011 at 2:22 am
Rick Russell
Precisely. The market can only provide economic value, not social value. Google and Apple don’t sink millions into projects solely for their social value, even though their efforts might bring social value as well.
I’m sure Google has spent millions supporting the Mozilla Foundation, even though they have an internal solution (Chrome) that competes directly with Firefox. They do this because they recognize that economic value will be gained in the long run from a vibrant, healthy, ad-supported Internet where browsers and providers and other tools compete with each other on features and design. It also has social value, but let’s not confuse this with the primary motivation for investment, which is profit.
> If the government does the same, there’s no difference but in whether we know.
I would argue that we don’t know whether the investment was successful, because (1) the bureaucrats involved have no reason to be honest about it, and (2) the decision to get government involved causes market players to flee the market space, resulting in little competition against which to measure the government failure.
Friday ~ June 10th, 2011 at 6:37 pm
Lord
Common Austrians would say yes. For them, M and V are, or at least should be, fixed constants. A dollar spent on something means a dollar not spent on anything else. A dollar always comes from somewhere and is always spent a fixed number of times. Savings are always the negative of investment. Savers are entitled to positive risk free returns. Growth that doesn’t crowd out is only malinvestment. Resources are never idle, only overpriced. Government hiring these overpriced resources only prevents their price from falling to levels business would hire them and squanders savings to pay for them. Monetary policy creates problems but cannot solve them, logical inconsistancy not withstanding.
Saturday ~ June 11th, 2011 at 9:31 am
Leigh Caldwell
I think you’ve answered your main question. Spending by Google (or the government) does increase aggregate demand when we’re not at full employment. When we are at full employment, crowding out happens and it doesn’t (at least not directly, in the Keynesian way; though it might still improve the “quality” of economic output and increase overall welfare).
You point out the key quality difference between the two: Google’s spending is market-tested and therefore is more likely to create utility, at least for those who spend money in the market. Government spending is different from Google spending in two ways, just one of which you mention:
“Because the government faces no market test there is no assurance that when the government pulls resources out of society that it is doing it for purposes with greater social value.” This creates the risk of mistakes or agency problems – thus government spending may be less good than private spending.
Counter to this, it is much easier for government to spend money on public goods or on projects with large positive externalities than it is for Google. Thus, government spending may be more good than private spending.
So, is government spending better or worse than private spending in general? Your answer might come down to whether you broadly trust the people who work in government to be well-motivated and get things right (or that systemic checks and balances will keep things working instead).
Saturday ~ June 11th, 2011 at 4:11 pm
Corey Mutter
I’ve seen this agrument from DeLong; I believe his wording was “replace ‘government’ with ‘Larry and Sergey’s Internet company’”.
I usually try to make the point in forums of “giving money to rich people / corporations is good because they spend or invest it, causing economic growth. Giving money to the government is bad because they… don’t spend it?”
Sunday ~ June 12th, 2011 at 12:28 pm
foosion
This point has been covered previously. I believe the first blog I saw it on was Brad DeLong’s.
Many arguments against government spending would apply with almost equal force against private spending and many such arguments essentially prove that economic growth is impossible.
Sunday ~ June 12th, 2011 at 9:32 pm
Rick Russell
This whole conversation is hobbled by the phrase “social value”. What is social value? How do we determine if an economic activity increases or reduces social value?
One of the great achievements of economics was to bring the concept of “economic value” into clarity. That took a long time, and even today you’ll find disagreement on whether certain activities generate economic value or detract from it (much of the disagreement surrounding the economic cost of risk). But, in many cases, we can identify enough factors in the calculation to make a meaningful decision.
Unless one has a rigorous definition of social value, and a way to measure it, then we can’t really come to any conclusions about it.
Monday ~ June 13th, 2011 at 11:02 am
q
but even now, in a situation where there is a shortfall of aggregate demand, some engineers are in high demand and have bargaining power high enough to demand higher wages. google and some other companies thrive on these individuals. for some reason these individuals are are hard to create. so of course if google, or a finance company, or anyone else with a lot of money demands them, it raises their wages, which may or may not reduce the quality of work across the rest of the economy (i would say yes) but at the very least crowds out other economic behavior due to higher costs of production.