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A Further Perspective
Friedman’s Four Ways
Who’s spending whose money? That’s the crucial question.
Sometimes the explanation for vexing problems is clear as can be after you see it. A perfect example is an observation made by the late Milton Friedman in a 2004 interview with Fox News:
There are four ways to spend money. You can spend your own money on yourself. When you do that, why you really watch out for what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well then, I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it costs, and I’m not concerned about what I get. And that’s government. And that’s close to 40 percent of our national income.
It would be nearly impossible to exaggerate how many of our current economic problems are explained by Friedman’s four ways of spending money. Think of the four ways in the order they’re presented as S1, S2, S3, and S4. As Friedman explains, the effectiveness of how money is spent declines inexorably as you move from S1 to S4.
The important demarcation line in ways money can be spent is between S2 and S3. In other words, the issue that matters most is your money versus someone else’s money. If you’re spending your own money on someone else, your spouse or children, for example, you still take the expenditure seriously. You still pay a price if you don’t look for bargains.
A new Gallup survey finds that “Americans believe, on average, that the federal government wastes 51 cents of every tax dollar, similar to a year ago, but up significantly from 46 cents a decade ago and from an average 43 cents three decades ago.” This is a good example of “the wisdom of crowds.” The trend shows that the crowd is wising up regarding the implications of gargantuan government.
The survey respondents are correct in their assessment of how government spends money, and you need go no further than Friedman’s distinctions of how to spend money in understanding the source of the problem.
My guess would be that many of the respondents would think the government doesn’t necessarily need to waste half the public’s money. The problem, however, is it’s the nature of the beast. Because of the realities Friedman refers to, the government will never be able to spend money as effectively as the private sector.
The problems associated with how the government spends money are not the result of who’s running the government. The problems are systemic. Unless government is seriously downsized, waste and inefficiency will remain problems no matter which party is in power.
The source of the problem can be further clarified by keeping in mind the observations of another economist, Steven Landsburg: “Most of economics can be summarized in four words: People respond to incentives.” (That’s the first sentence in his excellent book, The Armchair Economist.)
The incentives for spending money wisely and efficiently are simply too weak when it’s not your own money. It’s no skin off your nose if the benefits of the expenditure are a small fraction of the costs. When it’s your own funds being used, you will not only restrict your expenditures to things having more benefits than costs, you will choose the ones you think will have the highest ratio of benefits to costs.
When it’s your own money you’re spending, it costs you something when you spend it foolishly. That’s not to say that we never spend our own money foolishly, but it comes out of our own hides when we do. When we spend our own money foolishly, we’re left with less money to spend well. It’s a self-policing structure. Of course, your incentives are even stronger when you worked hard for the money in question.
When a politician or bureaucrat spends taxpayer money it’s treated essentially a freebie. It’s only natural that taxpayer money gets treated like monopoly money. Politicians and bureaucrats have virtually no incentive to care about the value of an expenditure or its cost. This is a profound disadvantage of public spending that will never, ever go away.
Contrary to the straw-man accusations of some liberals, conservatives do not advocate zero government expenditures. Conservatives definitely are not anarchists. Nevertheless, the inherent and inescapable inferiority of spending someone else’s money on someone else is a strong argument for minimizing the size of government. The public’s opinion that the amount of government waste has been increasing parallels the exponential growth of government.
The Solyndra fiasco is another recent confirmation of Friedman’s observations. Despite alarm bells going off, the Obama administration pushed the doomed endeavor forward. Why not? It wasn’t their money, after all. Because it has now becoming so notorious, it appears the administration may pay a political price. Nevertheless, half a billion dollars of taxpayer money has gone down a rat hole. Unfortunately, Solyndra is the rule, not the exception. Absurdly generous public employee pension plans are another predictable result of spending someone else’s money.
Friedman said that the fourth spending alternative is how we spend forty percent of GDP. He was, I think, referring only to budgetary expenditures. Forty percent is a lot. Unfortunately, it understates the full extent of the problem.
About the Author
Ron Ross Ph.D. is an economist who lives in Arcata, California. He is the author of The Unbeatable Market. Reach him at rossecon@gmail.com.
Letter to the Editor View all comments (79) | Leave a comment
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POST American| 10.5.11 @ 6:43AM
"Understand, there's NO reason on earth
why ANY nation shoud be borrowing money
---least of all the USA. This is a CON pure
and simple."
-ALAN WATT
(essential online coverage)
---Friedman burbles---
---It's WHO'S LENDING you the money?
-----WHY are you borrowing?
--------WHAT'S the nature of the currency itself?
USURY, and the actuarial psychopathy that
administers USURY, inevitably accompanies
USURY --------IS the problem.
BOTTOM LINE
--------USURY remains an ABOMINATION.
It has ALWAYS been tied up with deadly
forms of capstone CON-trol, TREASON
selective breeding and EUGENICS.
------It creates something out of nothing
and, thereby, mocks creation and GOD Almighty
himself.
----------------BOTTOMLESS LINE--------------------
"They're destroying everything
---counterfeiting everything! Religion,
culture, entertainment, emotion ---mankind
itself is now all, all of it ---all counterfeit!"
Or, as capstone gigglers point out -'counter--FIT'.
--SO, keep a goin' kiddies --keep a goin'
----FAKE OP/CO-OPTING Wall Street 'be ins'
-----n' Michael Moore's David Rockefeller eyes
--------------------Just keep a goin'---------------------
Timothy L. Pennell| 10.5.11 @ 8:35AM
Does ANYONE understand this guy?
Dan Hirsch| 10.5.11 @ 8:51AM
TLP,
It's kind of like watching a washing machine, things tumble by and every once in a while you recognize something, but then it goes away.
DTOM
squalis| 10.5.11 @ 9:03AM
That's funny.
Drunken Sailor| 10.5.11 @ 10:09AM
And accurate
Dan Mathewson| 10.6.11 @ 5:58PM
I agree, that's funny.
MOS was 71331| 10.5.11 @ 11:31AM
I can't even tell if he agrees or disagrees with the points made in the article. The most I can say about POST A is that he rarely insults other posters.
tsd| 10.5.11 @ 8:12AM
Just one more example of a simple truth... the government will never be able to spend your money better than you, the less of it they have the better off you are!
Timothy L. Pennell| 10.5.11 @ 8:42AM
Taxing us is bad enough. Taxing us too much, is really bad. Taxing what we have accumulated, over our lifetimes, and wish to leave to our Children, and have ALREADY PAID TAXES ON, is Heartless. And Taking our Private Property, and giving it to someone else, who will pay MORE TAXES, is CRIMINAL.
Those are Timothy L. Pennell's 4 ways our Freedoms, and Liberties, are Confiscated.
Oh, and then they piss it away.
The End.
Harry the Horrible| 10.5.11 @ 9:32AM
Beautiful.
However, the kleptocrats running our government don't "piss it away." They use it to buy votes, reward supporters, and launder it so that it can come back to them or their family.
It only looks like they're pissing it away.
MOS was 71331| 10.5.11 @ 11:34AM
Good point, Harry H. As long as we taxpayers are around to be looted, these looters will never go hungry.
TrueBlue| 10.5.11 @ 5:42PM
That brings up a point that really pisses me off. Property taxes... how the hell do we get taxed on property we, or our family, have already bought and paid for? Especially those people who have land that has been in their family for decades and more? The government, state or federal, never had any claim on it, contrary to popular belief their only responsibility was to parcel it out and register claims (with their properly associated filing fees); and even if you bought it FROM the government, once it's paid, why are you still getting charged for it?!
I won't even get started on the Death Tax...
squalis| 10.5.11 @ 9:02AM
Politicians spin the axiom that you can't get something for nothing completely on its head.
Their motto: I can give you something for nothing if you vote for me!
Dan Hirsch| 10.5.11 @ 9:05AM
Mr. Ross;
Wasn't Milton Friedman wonderful? I wonder if he had lived to see this he would have appended, B1 through B4, for the various forms of borrowing? E.g.B1 would be borrowing for myself and paying it back myself.
Bureaucrats' and Democrats' absolute indifference to wasting taxpayers' money probably doubles when they are borrowing the funds they waste. I believe that in their heart of hearts the thought is, 'we'll just screw the Chinese, after all they're screwing us.'
This massive debt will eventually turn into a casus belli, if we don't turn the situation around.
There really is no good reason for a government not to balance its budget every year, borrowing is nothing more than future taxes that the current government does not dare to collect today.
Does anyone really think that the Founders ever thought we'd place ourselves so squarely under another country's control as we have the Chinese? Think they'd approve?
We really do need an Amendment to limit spending to current year revenues. Limiting current spending is far too little, far too late.
It's time, actually it's past time. We should bring it up and start asking candidates.
Don't Tread On Me.
Al Adab| 10.5.11 @ 11:42AM
The great irony is that the Chicago politicians don't follow the Chicago school. We should ask in each "debate", "will your administration follow free market policies and the Chicago school of Economics?"
Al Adab| 10.5.11 @ 11:48AM
Dan,
Sorry to double up. The amendment must limit current spending to last years net income. Our city did it for several years running and the surpluses covered all unexpected emergency needs.
Bill A | 10.5.11 @ 9:42AM
These same arguments could be used in the insurance industry. I don't care if the doctor orders an MRI for my broken arm as long as I have health insurance.
Paul from SA| 10.5.11 @ 12:20PM
Yep. Friedman got me interested in economics back in the 80's, but what about fraud, specifically, insurance fraud.
I recall, on another related subject, Friedman said before his death that gov't spending is thee main problem. It's why cutting gov't spending is the most important thing we must do. The deficit and debt are secondary.
Gov't spending shrinks the private sector. We can improve a lot -- regulations and such, but as soon as we cut gov't spending, we will see the private economy begin to expand.
Clint| 10.5.11 @ 9:53AM
Big Government= Spending Other People's Money.
William R| 10.5.11 @ 9:58AM
Friedman is responsible for much of the mess we are in today!!
http://www.lewrockwell.com/north/north959.html
Bob K.| 10.5.11 @ 10:08AM
Lew Rockwell's been drinking too much flouridated water!
William R| 10.5.11 @ 10:34AM
You can't refute on thing. Nothing. Closing the Gold window has been a disaster. In 1971 the Debt was 450 billion. Today it is closing in on 15 trillion.
The 1971 Dollar has lost 80 percent of its value.
Friedman was a great advocate for Freedom, but truth be told his economic policies were wrong. And history has shown this to be true.
Trinacria| 10.5.11 @ 1:14PM
William,
Permit me to introduce you to the concept of "true/true and unrelated". True, the national debt in 1971 was $450 billion (when we abandoned the gold standard). True, the national debt is now approaching $15 trillion. However, to conclude that A and B are the causes of C is like claiming that A) I had less than $10,000 dollars in net worth when I was 18, at which point my acne cleared up; B) I now have over $1 million in net assets, therefore C) my acne was limiting my earning power.
It is curious indeed that you're able to perform the intellectual and economic gymnastics that allow you to directly connect the move from the gold standard in 1971 to the enormous and unprecedented debt now facing the country, yet you can't make the elementary (and logical) connection between the mounting debt and the unprecedented and unsustainable borrowing and spending that has taken place under the previous 2 administrations. When you spend more than you have, you get deeper in debt - regardless of the standard upon which your currency is based (and, as Mr. Friedman correctly pointed out, you're a hell of a lot more likely to spend more than prudence dictates when you're spending someone elses money).
The emperical evidence in support of Mr. Friedman's ideas on the four ways to spend money is as unassailable as it gets.
William R| 10.5.11 @ 2:27PM
Reagan doubled the national debt in 8 years. None of this would have been possible under Gold
Reagan's Budget Director David Stockman explains
http://www.businessinsider.com.....fed-2011-9
Trinacria| 10.5.11 @ 3:09PM
Quite so. Indeed, a lot of things would not have been possible under gold (some of them quite good, too). But black/white "in a vacuum" thinking does rather tend to overlook these nuances, doesn't it?
Drunken Sailor| 10.5.11 @ 10:41AM
You do realize that the guy who wrote the article you link to (Gary North) was one of the crew that predicted the Y2K crash don't you?
How did that work out?
William R| 10.5.11 @ 10:42AM
He was wrong on that. But he's right about Friedman, fiat currencies, and floating exchange rates.
Clint| 10.5.11 @ 10:45AM
Inflation= The Great Hidden Tax.
Bob K.| 10.5.11 @ 10:30AM
The problem with S4 is that it is never enough and it inevitably leads to monetary inflation which is needed because of the inevitable inflation of the Government Bureaucracies needed to distribute these monies. But first, the monies must be distributed amongst the bureaucrats!
And so begins the never ending upward governmental bureaucratic spiral sucking more and more sustenance out of the economy which is needed in order to keep itself growing. Each new govermental agency needs new employees, then it needs Lawyers, then it needs an Investigative Bureau and finally it needs Police Powers!
It is a fact that the fastest way to get promoted in Government work is to begin working in a newly formed Governmental Agency!
And that is why Gibson Guitar Company got raided by uniformed Americans from the EPA of our Government who were wearing Flack Vests and carrying Automatic Weapons!
Who can argue the notion that the best thing that could happen to our economy would be to throw at least 50% of the people working in Governmental Agencies out into the streets to fend for themselves. More would be better but 50% is a start!
Clint| 10.5.11 @ 10:30AM
Austrian School Economics Trumps Obama's Failed Keynesian Economics Best.
Friedman's was Chicago School Economics.
Paul from SA| 10.5.11 @ 12:21PM
Ludwig von Mises #1!
VonMisesJr| 10.5.11 @ 10:40AM
Milton Friedman on greed and capitalism:
http://remnantculture.com/?p=1619
In 1976, Dr. Friedman won the Nobel Prize for economics. In 2008, Paul Krugman was awarded the same. This proves Darwin's theory of evolution is bunk.
Clint| 10.5.11 @ 11:07AM
Austrian School Economist Friedrich Hayek's Great Work: The Road To Serfdom, on the dangers of central planning.
In 1974, Hayek won The Nobel Memorial Prize In Economic Sciences.
Al Adab| 10.5.11 @ 11:46AM
Clint,
You are on target today. Free markets will get us back on track, but it will take time and sadly, lots of it. How long before the economy reaches 2007 levels again?
Jack London| 10.5.11 @ 12:15PM
You want to go back to the toxic debt levels just before the crash?
Al Adab| 10.5.11 @ 12:39PM
Makes today's debt look minor by comparison, but NO those debts were unsustainable as well. My reference is to economic strength and activity.
Clint| 10.5.11 @ 12:52PM
In 2007 ,The GDP growth rate was 2.9 Percent,the Unemployment rate was 4.6 Percent,the Dow was well over 12,000 pts.
The GDP growth rate is now at 1.3 Percent, the Unemployment rate is 9.1 Percent, the Dow is at 10,800 Pts.
Clint| 10.5.11 @ 1:16PM
Total Public Debt October 2007: $ 9 Trillion
Total Public Debt October 2011: $ 14.8 Trillion.
Jack London| 10.5.11 @ 2:54PM
Yes Clint, but it was all built on a pile of sand.
Jack London| 10.5.11 @ 3:00PM
We'll never have sustainable economic strength if you support ever increasing polarization between a powerful rich few and a mass of poor people. All you do is cut purchasing power and fuel debt, and the vast wealth of the rich just fuels bubbles and vested power in a few. This piece in a British newspaper caught my eye today – read it and learn.
http://www.guardian.co.uk/comm.....equalities
Al Adab| 10.5.11 @ 3:25PM
I cannot think of anyone who proposes polarization between rich and poor on the Conservative side. The Left seems to use it as a rallying cry though. The issue likely is how best to help the poor.
"A wise and frugal government shall not take from the mouth of labor the bread it has earned." T. Jefferson 1st Innagural
"A rising tide lifts all ships." JFK
"That some become rich means that others may become rich." A. Lincoln
"The wise king reduces his taxes to prosper his country." Ibn Khaldun
"To tax one person, group or class to give to another person, group or class is theft." John W. Davis
There are many more but to believe that anyone wishes the poor to remain so (except those who prey on them through fostering victimhood) is simply a false view.
Jack London| 10.5.11 @ 4:11PM
Yes, but your policies have the opposite effect to what (you say) you want. Depressing wages and conditions for the many and adding vast wealth to the rich - which Reagan got underway - has lead to the housing bubble and crash. Here's another article that explains why inequality if very bad for our economy. Tell me why it's wrong.
http://www.thenation.com/artic.....ng-economy
As he says:
'This brings us to the question of why we got the housing bubble in the first place, which goes directly to the issue of inequality. In the three decades after World War II, there were no notable bubbles in the economy. Productivity growth translated into wage growth, which in turn led to more consumption. The increased demand led to more investment, productivity growth and wage growth.
'This virtuous circle was broken by Reagan-era policies intended to weaken the power of ordinary workers. Wages no longer kept pace with productivity growth, eliminating the automatic link between productivity growth and demand growth. This led to excess capacity in the economy, which was filled in the 1990s with demand generated by the stock bubble and in the 2000s with demand generated by the housing bubble.'
And as the other article I cited says - and this is one of four factors related to inequality:
'...concentrating income in fewer and fewer hands eventually leads to "bubble" economies. From the early 1990s, the surge in inequality unleashed a flood of footloose global capital – a mix of corporate surpluses, bank lending and burgeoning personal wealth. Bank assets in the UK ballooned four times faster than growth from the mid-1980s, while the value of funds invested by the rich more than doubled over the decade to 2008 to reach $39,000 billion. It was these "surpluses" that contributed to the bubbles – in housing, property and business – that eventually brought the global economy to its knees.'
Clint| 10.5.11 @ 4:39PM
"In 2006, before home prices began their decline, Peter Schiff, a supporter of the Austrian school, made predictions regarding a crash in home prices. Schiff predicted a dramatic fall in home prices as the result of a bursting housing bubble which was inflated by artificially low interest rates, adjustable rate mortgages and real estate speculation. Schiff felt the bubble was being fueled primarily by the Federal Reserve and GSEs."
Al Adab| 10.5.11 @ 4:51PM
Sorry jack, but your premises are flawed. No ones money or proerty should be treated differnetly than anothers. The inequality you cite is indeed bad for our society but mostly because one group profits by it for their own powers sake. Conservatives wish to see many more become rich given Liberty in our society and the opportunity which they deserve and which government so often - in its desire to do good- crushes. Freedom and Liberty are more important than an individuals economic status which is always subject to change. You make the case that we have sold our birthright of freedom for a bowl of government pottage and a false economic security.
Al Adab| 10.5.11 @ 4:53PM
Jack, I apologize as I meant to capitalize your name. No insult intended.
Jack London| 10.5.11 @ 5:09PM
You've not really understood this at all, have you? But I'm pleased you recognise inequality is bad. It's not about confiscating your precious property - although clearly we need more equitable taxes on unearned income. It's about working people taking a better share of ongoing earnings, and investment in skills and infrastructure, so people can actually participate in the economy and generate demand, as we were pretty good at doing in the three decades after wold war II.
So - inequality is bad. it fuels low social mobility, high crime and poor health, as well as a deflationary, declining economy. The 400 families that own about half the nation's wealth cannot possibly be good for us (think about it: it's incredible). What's the solution? Or do you just hide in your bunker?
Clint| 10.5.11 @ 6:01PM
"Statistics show consistently that a few wise choices early in life make poverty virtually avoidable. Graduate from high school, stay out of jail and off drugs, and wait until marriage to have children. Do these and you are almost never poor in America."
This Class Warfare agenda is like telling Americans to give Haitians & the rest of the world's poor our money until they are equal to us.
Al Adab| 10.5.11 @ 6:11PM
Solution to what problem? That some have more than others? That is not a problem. That one persons money and property is treated differently than anothers? That is a problem.
Perhaps there was a reason the Constitution had to be amended to create a tax on income. It is a bad idea as we have learned.
What bunker?
Jack London| 10.5.11 @ 6:33PM
The solution, Al, to reversing the huge inequality that is so severely damaging our society. Let's take one factor - executive pay, which is now 300-400 times low-paid workers, whereas 30 years ago it may have been a 50-100 times ratio. Why did this happen? It wasn't because the corporations were making much more profit - quite the opposite in fact for many.
Al Adab| 10.5.11 @ 7:10PM
It is not the fact of the divergence of wealth that is the problem, but rather the use to which that fact is put by those who use it to further their own power that is the danger. It is no problem that some have more than others, it is a problem that so many believe the lie that they have less because of it. Liberty is of greater value than mere wealth.
Indiana Alex| 10.20.11 @ 2:02PM
I suppose you wouldn't support allowing the "working poor" to accumulate assets by allowing them to control the 20% or so of there wages that fund the current Ponzi messes known as Social Security and Medicare.
Allowing wealth transfer generationally would allow everyone who works to participate in becoming wealthy.
Of course Liberals can't allow this as those who are not dependant on government are far less likely to elect liberals.
Clint| 10.5.11 @ 3:48PM
Those rich people create jobs.
Class warfare is a lib thingy.
American Families Are Workers/Consumers/Investors.
Intelligent Design| 10.5.11 @ 12:14PM
Our economy is declining pretty much at the same rate that we have adopted socialism. Obama and the rest of the Demo-Socialists have learned nothing from the collapse of the USSR, and the failure of socialism everywhere it's been tried. But the Chinese learned at lot. Their economy has gained strength as they have opened up to capitalism.
1ConservativeUSA| 10.5.11 @ 12:24PM
In addition to Friedman's theory, let's not forget another issue, that government officials spend (other peoples') money with the incentive of obtaining favor, $upport and votes.
This system provides opportunity for an ethically challenged politician to serve his own interests over those of the country.
Pat| 10.5.11 @ 12:50PM
Economists seldom think beyond their graduate school charts and graphs which is why this author, being an economist, had to misunderstand the problem entirely. Government is a “ready”, “fire”, “aim” economic organization – they spend the money before they have it. “We should definitely budget for that” is what they say after they’ve spent our money, which seems basically illogical but not for modern governments. Now a traditional economist would claim you can’t spend your wealth before it is created but our government has easily proven that’s not true either – governments can spend wealth today that doesn’t currently exist and which may never exist.
The vast majority of Americans still cling to those economic theories we learned at our mother’s knee and unfortunately still thoroughly believe in, unlike the existence of the Tooth Fairy, in which only 30% of adult Americans still believe. Think of it this way – the economic theory of how your wife shops at the local grocery store, the choices she makes, her logical basis for accepting or rejecting products, has absolutely nothing to do with our government. Traditional economics is Newtonian physics but government economic theory is like quantum mechanics. Wave particle duality – stuff that messes with your head and is very difficult to understand – constitutes the new physics but Americans are still focused on apples dropping from trees, hitting sleeping guys on the head and what that all means.
Consumers are from Mars, governments are from an alternate universe accessed via a black hole. Which is why if you ask two economists their opinion on the American economy today you’re likely to get three answers. We need entirely new theories of economics to explain these bizarre economic forces we see at work around the globe. We need charts explaining “crony capitalism”, equations which illustrate how political influence commandeers private wealth and how this unearned and non-existent wealth ripples through the economy. But our economists won’t admit their world has drastically changed, they’re still trying to understand how that apple fell off the tree and what that sleeping guy thinks about the whole apple bonking issue.
Trinacria| 10.5.11 @ 1:24PM
"Traditional economics is Newtonian physics but government economic theory is like quantum mechanics. Wave particle duality – stuff that messes with your head and is very difficult to understand – constitutes the new physics but Americans are still focused on apples dropping from trees, hitting sleeping guys on the head and what that all means."
No - the problem isn't that economics is too complicated for the average American, it's that it's too complicated for the average politician. Economics, to be clear, isn't quantum mechanics; treating it as such (wave particle duality - I can both not have money in the account and spend it at the same time) is what has gotten us in trouble. More Newton, less Einstein.
Pat| 10.5.11 @ 2:12PM
Sorry, can’t agree with your take on this. Since the 50’s, professors teaching macro-economic theory have bored legions of freshmen students with the proposition that government actions can be discounted relative to general economic theory. Decisions on whether to save or invest, to spend now or spend later can be understood without considering the actions of governments and the government’s effect on the economy – or so we were told.
Today, these are outmoded theories of economic behavior which fall in the same nonsense category as the rules of alchemy. Economists today are like blacksmiths in the early 1900’s – “those new-fangled horseless carriages are just a passing fad and will never replace the horse”. Moribund thinking by tradition bound minds.
Today, the Federal Reserve is completely stymied on what monetary remedies to apply – they’ve tried everything, nothing works. Governments are waiting for consumer spending to resurge but can’t explain why it won’t return to robust levels, politicians are reduced to playing pom-pom girls, cheering on consumers to spend and spend lavishly, demanding that businesses utilize their cash hoard and run the ball in for a touchdown. Stimulus Bills in the trillion dollar range fail to elicit the effect Keynes predicted. Unemployment levels have soared and appear to be stuck at new and seemingly permanent levels.
Consumers don’t understand the economy, politicians don’t understand the economy and professional economists are spinning like tops attempting to form a group consensus. When First World government spending consistently consumes 40 to 50% of GDP, the old economic theories of Friedman, von Mises, Hayek and Keynes have no more validity than astrology in attempting to explain present day economic phenomena.
Trinacria| 10.5.11 @ 3:05PM
With all due respect, you've rather proved my point.
By way of example, you seem to conclude that the failure of the trillion dollar stimulus bill to elicit the effect Keynes predicted is evidence that the old accepted models suddenly no longer apply in this new and complicated world of strange economic phenomena. Indeed, this is precisely the view of most liberal politicians and Paul Krugman-types: they're stunned that the prediction model they've embraced has failed to achieve the desired effect and, rather than concluding that perhaps the model was inherently flawed, they make the stunning leap to the conclusion that it must be the result of some very strange and unexplainable economic phenomena. For the life of them, they can't understand why those ignorant customers don't understand that they should be spending more and those selfish businesses don't understand that they should be hiring. But it's all perfectly understandable to the businesses and consumers; in fact, it's quite simple. I don't have the requisite confidence and/or cash to engage in robust economic activity; therefore, I need to take a prudent and conservative approach and live within my means. Unlike those in the government, they understand that when one finds oneself in a hole, the best strategy is to stop digging.
You state that when government spending consistently consumes 40-50% of GDP, Friedman's theories no longer apply. But of course they do; indeed, unlike Keynes, Friedman correctly predicted that models based on S4 spending will result in precisely the unsustainable disaster that we're now facing.
Pat| 10.5.11 @ 4:16PM
Actually, no one, including Friedman, has predicted the current state of our economy – it’s your interpretation of Friedman aided by a little Monday morning quarterbacking (no offense intended). Professional economists are merely sociologists with an aptitude for math. Their goal isn’t to predict what human behavior could be, might be or should be, it’s to explain what it is and probably will be under mathematically defined circumstances. What our behavior should be, either individually or as a collective, is the province of religious practitioners or ethicists. Some of your other comments on this thread list various actions we should be taking to correct our problems and while your ideas may be laudable as well as something we should consider in theory, the reality is we are not taking any of those actions now, nor are we likely to – the should be vs. the what is.
The dynamic relationship between the individual, the government and the economy is the fundamental “what is” and our economists are clueless on how this relationship currently stands. Partly due to politics (besides being sociologists, they are also human) and partly due to models which failed to consider a major influencing factor (the government) which they erroneously – and previously - discounted. We don’t have the mathematics to predict economic behavior under a system heavily dominated by government intervention into every nook and cranny of our economy. There are far too many variables to consider when the government enters the fray, too many unpredictable potential outcomes, too many “tops down” decisions which fly in the face of predictable human motivations and logical decision criteria.
The political and economic system we live under now is what it is – we can’t wipe the chalk board clean and start over. But to make our outmoded economic theories work, wiping the board clean and starting over is exactly what we would have to do. I agree with your politics but can’t agree our citizenry will collectively realize what the problem is and take the necessary steps to correct it – nor do I think our economists are bright enough to correctly analyze the problem and bold enough politically to insist we make the necessary corrections.
Trinacria| 10.5.11 @ 4:37PM
"We don’t have the mathematics to predict economic behavior under a system heavily dominated by government intervention into every nook and cranny of our economy. "
With respect, we don't need mathematics to predict economic behavior under a system dominated by government intervention into every nook and cranny of the economy - we actually have the data! We've seen the movie, and we know how it ends... Greece, Spain, Italy, France, Russia (and it's predecessor), Cuba...there's a remarkably consistent pattern, and there appears to be very little in the way of contrary evidence.
"But to make our outmoded economic theories work, wiping the board clean and starting over is exactly what we would have to do. I agree with your politics but can’t agree our citizenry will collectively realize what the problem is and take the necessary steps to correct it – nor do I think our economists are bright enough to correctly analyze the problem and bold enough politically to insist we make the necessary corrections."
On this point we completely agree. Quite regrettably, we're rapidly approaching the point where the takers outnumber the providers; as de Tocqueville rightly pointed out, this represents the critical point of no return for any democracy. Pity. But it was a hell of a great country while it lasted.
Pat| 10.5.11 @ 6:19PM
Agree, certainly you, and hopefully I, don’t require an elaborate mathematical model to make rational decisions between economic alternatives. In fact, the fundamental basis for existing mathematical models is the prime assumption that consumers will always make rational choices between competing economic alternatives – at least at an aggregate level of population. And exactly how would you develop your mathematical models using the prime assumption consumers will always make irrational choices? And what if irrational economic decisions were highly prevalent within an economy?
Consider an example near and dear to Obama’s heart. Would you give a mortgage loan to someone without a down payment or holding down a steady job? As an individual banker, your rational decision would be “No”, you would use the money to fund a different loan with less risk or sit on the money waiting for a better economic opportunity to come along. But what if the government forced bankers to make such irrational economic decisions, both in frequency and widespread geographically, then how does your economic model obtain predictability? Now magnify these “tops down” irrational economic choices a thousand fold and economists lose all ability to understand or to predict.
And that’s where their mathematics fail them, when you can no longer make a basic assumption about human behavior. The only assumption we can presently make is that we’re at the mercy of irrational economic decisions on a massive scale and we lack the political will to return to our previous base assumption.
Trinacria| 10.5.11 @ 7:34PM
Agree almost totally, though I would (at the risk of splitting hairs) suggest that both you and I (and I hasten to add any economist worthy of even the most cursury respect) knew quite well what would happen once banks were forced to provide unsecured loans to unqualified borrowers. True, none of us could say with any degree of precision how long it would take for the bubble to build and then burst, nor could we quantify the precise magnitude of the ensuing fallout, but we all certainly knew that giving huge loans to individuals who had no reasonable chance of repaying them would end badly. Quite badly. In 2003, I moved to a gated community in Marin County, CA with homes that start at 7 figures (they're not that impressive, trust me) and was immediately struck by the fact that almost all of my neighbors were immigrants (mostly Mexican, Russian, and Indian) with extended, multigenerational families living under the same roof. It wasn't hard to see what was happening: people were accepting the "gift" that the government was giving them in the form of no-doc, interest-only loans that they couldn't afford, with the hope of flipping them when the fully amortized payments kicked in (the property values always go up, right?). Who among us was surprised when the inevitable foreclosures began, driving property values precipitously lower, forcing even more foreclosures, and fueling the self-perpetuating fire that has been burning ever since?
fmm| 10.5.11 @ 1:41PM
Freidman's and Landsberg's comments are wonderfully explanatory but offer no solutions in themselves. How about coming up with a list of incentives to move the spending behavior of government from S4 toward S1? Is this even possible?
Trinacria| 10.5.11 @ 2:32PM
1) Balanced budget amendment to the constitution
2) Amendment to the constitution requiring a 2/3 majority in both houses to increase taxes
3) Prohibit earmarks
4) Flat tax (everyone pays something - the more people who have skin in the game, the less electoral support there will be for candidates who want to raise taxes and spend unwisely)
5) No tax, no vote. If you have nothing at stake, you get no say. Period.
6) Withdraw from the UN, cease and desist all further financial support of the UN and UN "peace keeping" activities, lease the current UN headquarters.
7) Abolish all agencies exercising powers not specifically granted to the federal government by the US Constitution (Education, EPA, Labor, ...)
8) Eliminate the TSA and contract out the security work to competent, professional, and efficient private agencies
Just a start...
Al Adab| 10.5.11 @ 3:28PM
Not a bad list although I might discuss the possible value of staying on the UN Security Council with our veto. Absolutely we should stop financing and hosting that anti-american institution.
Perhaps my Sicilian friend you can make them an offer they can't refuse.
Clint| 10.5.11 @ 4:20PM
An interesting point to recognize.
Dr. Ron Paul,
"If you cut off all the earmarks, it would be 1 percent of the budget. But, if you vote against all the earmarks, you don't cut one penny. That is what you have to listen to. We're talking about who has the responsibility, the Congress or the executive branch?
I'm saying, get it out of the hands of the executive branch. Just listen again about what I have said about the TARP funds. We needed to earmark every penny. Now we gave them $350 billion, no earmarks, and nobody knows..."
Dr. Ron Paul has never voted for an earmark or an Appropriations Bill, out of a principled stance, until Congress stops The Executive Branch from usurping their power & deciding where taxpayers' money is spent.
Dick Nome| 10.5.11 @ 9:18PM
That's right. Rube Paul puts his earmarks in bills he knows will pass so he can vote against them. He gets it both ways. Sly old coot.
Trinacria| 10.5.11 @ 4:42PM
"Perhaps my Sicilian friend you can make them an offer they can't refuse."
Hey, Pierre, that's a lovely baby-blue combat helmet you have there. Does it protect your knee caps? I'm just sayin'...
Al Adab| 10.5.11 @ 6:12PM
??
Trinacria| 10.5.11 @ 7:37PM
Wasn't me, my friend. Apparently someone isn't aware of the dangers of impersonating un'uomo d'onore...
Al Adab| 10.5.11 @ 7:42PM
Gratzi
Butch| 10.5.11 @ 4:46PM
If we could have just number 5 right now, we could secure the rest and more easily and immediately.
POST American| 10.5.11 @ 10:51PM
------------------BOTTOMLESS LINE------------------
Laughs galore as the capstone tries to deflect,
discredit and co-opt the swelling awareness
of mainstream, GENUINE Americans.
We're speaking of the Wall Street 'occupation'
of course.
In all the scripted mayhem, you'll NEVER hear a quality word on the FED from our utterly bought off, utterly CON-trolled media.
SO ------enjoy Roseanne in her MAO jacket,
and get a good long look at Michael Moore's
David Rockefellow eyes.
Of course, no media figure pointed out
to Roseanne that MAO was the creation of
INTER-national, Globalist, USURY banking
---and ALLLLL the warm EUGENICS that implies.
The RED China 'miracle' of today is utterly
the creation of the actuarial psychopaths
of the CFR etc. ---and was entirely underwritten
and enabled by the US taxpayer.
In short, they were handed our economy,
and are soon to be handed our actuarial
EUGENICS policy implementation.
The same CFR bunch, indeed, the very same
families, behind the 'Agenda 21' takedown
of the West right now---and in earlier ages
behind African slavery, the destruction
of old China with opium, multiple Soviet
and Nazi Halocausts---World Wars ---Depressions
--assasinations and, as ever, EUGENICS.
When you're ready to take back the
country --for the first time in your life,
get with this weekend's nationwide 'Occupy
the FED' rally.
ALAN WATT's audio archive from Natl' Intel
will lay it all out for you ---FOR REAL.
-------------------------------GO THERE NOW
Dan Mathewson| 10.6.11 @ 6:01PM
Nah, I won't got there. I have much better things to do with my time.
Solo| 10.6.11 @ 10:32AM
Great discussion with Pat and Trinacria. Thank you both. Very informative and well stated positions.
I'm inclined to think that the over-bearing Goliath which our government has become is the true culprit in having skewed the economic paradigms.
And it's not JUST government at the Federal level but at the State, county and local levels, as well. All have had a cumulative effect.
I make just 5 figures per year but...when I add up the sum total of all my taxes; Fed payroll, Fed income, State income, property tax, toll roads (they're a tax) and then the taxes on my electric bill, gas bill, telephone bill, cell phone bill, gasoline tax, sales tax, license fees on my vehicles..and on..and on...and on...
I'm already paying more than 60% of my income to government. And this doesn't include the hidden tax of government regulation which serves to drive up prices at the point of sale. And this is particularly true of the price of Health Care and energy products.
I would like to see a comparison between the total cost of government at all levels in, say, 1950 as compared to today...as a percentage of the average mean income of a middle class family.
I'd be willing to bet that the difference would be gobsmacking.
What has taken the "middle" out of the "Middle Class" is the growth of government and that alone is going to skew the purchasing decisions (and their effect on the economy) made by the vast majority of people enough to render the more traditional assumptions about economic activity obsolete.
The old rules, intended to be applied to a free market economy, no longer apply. We are all Lilliputians scattered hither and yon by a lumbering drunken giant within our midst.
POST American| 10.7.11 @ 3:21AM
-------------------------USURY---------------------------
----------------------------IS-------------------------------
-------------------ABOMINATION----------------------
-----------and operates TREASONOUSLY------------
and, ultimately ---
------------------------USURY----------------------------
------------------------BEGETS---------------------------
-----------------------EUGENICS-------------------------
ALWAYS-------------ALWAYS-------------ALWAYS
It's all out in the open now, on record, and
staring you right in your meds addled face.
---------WHAT are we NOT getting?
don bumpass| 10.9.11 @ 6:13PM
i understand ross's point. it's nice to have direct and to-the-point stories. keep these stories/analysis coming our way.