Since I can remember I’ve loved reminding my audiences that economics is not morality play. It wasn’t until Paul Krugman started blogging that I realized that I must have picked it up from one of his early writings.
That virtue can sometimes be vice is one of the most fun lessons of economics. There is a perverse delight in explaining how foreign aid may impoverish the Third World but sweatshops would make it grow rich.
I can understand why many of my fellow economists were so eager to transport this insight to the political realm. Politics they argued was a fight between interest groups – a battle over the fiscal commons. There weren’t good guys and bad guys. There were just naturally self-interested people.
Tyler Cowen pays homage to this legacy in a recent NYT piece
James M. Buchanan, a Nobel laureate in economics — and my former colleague and now professor emeritus at George Mason University — argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic.
Curiously Tyler refers to a rational actor model as a moral critique but then again he certainly knew Buchanan better than I.
Still, to borrow a phrase from another of my favorite economists, the only problem with this analysis is that it is at odds with the facts.
If we want to build a model of what the government spends money on we would be best to start this way: ask people what social obligations do they believe “society” has. Look around for the cheapest – though not necessarily most efficient – programs that could credibly – though not necessarily effectively– address those obligations. Sum the cost of those programs. That will be government spending.
Contrary to Jonah Goldberg and others who see Canada and the United States as examples of two clashing ideologies, they are actually examples of two different ethnic distributions. The United States is not Canada because there is ethnic strife between Southern Blacks and Southern Whites. That strife reduces the sense of moral obligation on the part of the white majority and so reduces government spending.
I want to be very clear that I don’t say this to paint those against social spending as racists. From where I sit I am betting that most of the intellectuals lined up against expanding the welfare state are naively unaware that their support rests upon racial strife. Otherwise they would realize that as America integrates they are doomed. They are fighting as if they believe they have a chance of winning. Given the strong secular trend in racial harmony, they do not.
I point this out also to show why the major Republican strategy for limiting government was doomed from the start and why I am also not particularly worried about Americas fiscal future per se.
In the 1980s some conservatives believed that they might not be able to cut government but they could cut taxes and thereby starve the beast. Rising deficits would force the hand of future governments. Spending would have to be cut in order to bring the budget into balance.
Much of the current handwringing about fiscal irresponsibility is a sense of alarm not only on the right, but throughout much of the political center, that these spending cuts are not actually materializing.
But, by what theory of government did you ever believe they would? Governments don’t look at how much money they have and then decide what they want to buy. They decide what they want to buy and then they look for ways to fund those purchases.
Divorcing the two – through sustained deficits – was only going to lead to ever increasing levels of debt. This is what we got. At no point was the beast ever starved. The peace dividend lowered government spending growth somewhat, but that was undone by the war on terror. Otherwise spending hummed along, as it always will, with the government buying things the public thinks it ought to buy.
Yet, if this is causing upset stomachs among many of my fellow bloggers it calms mine. Its quite clear how this will end. Racial strife will continue to abate. The public will coalesce around the welfare state and taxes will be raised to meet the cost.
The fundamentals do not predict rising debt forevermore. The fundamentals predict a VAT.
This is not to say I am unconcerned about our economic future. Health care costs will continue to eat up more and more of our economy unless something is done. However, trying to convince people that health care is not a social obligation a fool’s errand. The best you could do is convince them we have no obligation to the other. As the other integrates this will likewise prove impossible.
No, people will ultimately believe that health care for all is a social obligation and therefore government will pay for it. There is no more analysis to be done on that part of the question.
The only part left is looking around for the cheapest program. This is where our attention should be focused. Can we lower the cost of those obligations? Can we make medicine more efficient?
If we can there will be economic room for other things. If we can’t, well just hang in there until the artificial intelligence revolution.