Putting Dwight’s Quotation to More Use

by Don Boudreaux on December 10, 2011

in Country Problems, Myths and Fallacies, Other People's Money

Here’s a letter to WTOP Radio:

In today’s 7am hour a pundit, interviewed by your anchors, said that the fiscal problems besetting many European countries are “hard to fix” because these problems have “complex origins.”

I disagree with his claim about the alleged ‘complexity’ of these problems’ origins.  These fiscal crises are the perfectly predictable consequences of spending other people’s money.

As the economist Dwight Lee notes, “Because of the absence of privately owned and transferable claims against the collective value created, or destroyed, by political decisions, citizens will be less sensitive to reductions the long-run wealth of the general political community than to temporary, but individually realized, benefits.  For this reason politicians can pursue with impunity a policy analogous to that of excessive corporate borrowing to finance current benefits.”*

Advocates of government intervention readily see the elemental truth of Prof. Lee’s observation when the parties spending other people’s money are private corporations.  In fact, these advocates ‘see’ this problem, mirage-like, in the private sector even when it’s absent.  Mysteriously, though, these same folks are blind to the same problem as it plagues the public sector.  If, as Pres. Obama said this week, spending other people’s money is a recipe for irresponsibility, how are fiscal problems ‘solved’ by enlarging the size and scope of government – an agency far more dependent than is any private corporation on spending other people’s money?

Sincerely,
Donald J. Boudreaux

* Dwight R. Lee, “Deficits, Political Myopia and the Asymmetric Dynamics of Taxing and Spending”; chapter 16 in James M. Buchanan, Charles K. Rowley, & Robert D. Tollison, eds., Deficits (New York: Basil Blackwell, 1987), p. 296.

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{ 18 comments }

Josh S December 10, 2011 at 9:47 am

Because government isn’t motivated by profit. It is motivated by the good of everyone. That way, you know that when it spends a trillion dollars, it spends it wisely and for the public benefit.

Well, only when the government is run by Democrats. Republicans are too evil to be trusted with that kind of money.

muirgeo December 10, 2011 at 9:48 am

What BS. Most countries in Europe carried little debt before the global economy was blown up by privately manufactured Wall Street financial products. And austerity measures are making things worse not better.

From Angry Bear; Fiction in the Washington Post 12/9

“Spain and Ireland were running budget surpluses and had a debt to GDP ratio lower than Germany’s. Italy had a primary surplus and declining debt to GDP ratio.”

From Economist View 12/9

http://economistsview.typepad.com/.a/6a00d83451b33869e2015394410938970b-popup

Jack Costello December 10, 2011 at 10:36 am

The Irish government ran budget surpluses before the crisis only because the taxes it raised fro the enormous property bubble allowed it to buy votes through prolific spending. For instance, from 1997-2007, Irish public sector pay went up at double the rate of inflation, while dole payments was tripled in real terms and the universal child benefit payment was increased to nearly six times of its value in 1997.
Once the amount of tax generated by property transactions collapsed, the true scale of the government’s unjustified financial largesse became apparent and it was left with no choice but to behave in a marginally more responsible manner.

Cutting government spending is essential to allowing the Irish economy to grow again. The biggest decline in Irish GDP occurred in 2009, as a direct result of the implosion of the property bubble, and before any serious attempt was made to cut government spending. Indeed, in 2009, the only significant austerity measures consisted of tax increases. They didn’t work, by the way.

Sam Grove December 10, 2011 at 12:44 pm

So promised pension benefits and welfare growth aren’t debt?

We’ve seen this all over the U.S. During boom times, government grows mightily as though the boom is here to stay, then, when it collapses, revenues decline, but public payroll and pensions are very “sticky”.

That’s the problem with economic booms.

Jeff Neal December 11, 2011 at 9:53 am

So, no more booms will solve our problems?

Jeff Neal December 11, 2011 at 9:52 am

m,

I want to know, please, which of those Wall Street financiers had guns? There is no way a politician would have done something unwise with other people’s money unless he was forced to do so, right?

Nevada Doctor December 10, 2011 at 10:10 am

The advocates of government intervention, I would term Stasists. We must not wish for technocrats who can solve the hard to fix problems. Stasists demand that knowledge be articulated and easily shared. Stasists seek specifics to govern each new situation and keep things under control. Stasists are traditionists and technocrats. They opposes international trade, immigration, Wal-Mart, biotechnology, the Internet, and suburban sprawl. Half the Stasists prefer a pre-industrial past, the other half envision a bureaucratically engineered future. Both share a devotion to a controlled, uniform society that changes only with permission from the established central authorities.

This stands in complete opposition of everything Hayek stood for. He said, “It has become almost impossible to use “liberal” in the sense in which I have used it. What I should want is a word which describes the party of life, the party that favors free growth and spontaneous evolution. I have racked my brain unsuccessfully to find a descriptive term which commends itself.”

I think the word Dynamist works nicely. Dynamists appreciate dispersed, often tacit knowledge. Dynamists like Hayek want to limit universal rule making to broadly applicable and rarely changed principles. Rules that foster people creating and testing countless combinations. Rules that embrace emerging cultural change, individual choice, and the fluid open society we will have to adapt to survive within.

If one believes in Hayek, one cannot be a Stasist, One must not view the future as a dangerous abyss. The “Party of Life”, the Dynamists, must boldly embrace the emerging unknown. They must fearlessly welcome the painful trials and errors that are a necessary part of societal progress and a better life for all.

nailheadtom December 10, 2011 at 10:39 am

There’s a geat scene in the 1973 Walter Matthau-Bruce Dern film “The Laughing Policeman” (Adapted from a book of the same name written by two avowed Swedish Marxists) where the two San Francisco detectives investigating a mass murder enter an illegal gambling operation. The gamblers are using toothpicks as chips and well-armed authority figure Dern “redistributes” them among the players, similarly to government actions at higher levels of the economy.

Invisible Backhand December 10, 2011 at 10:55 am

I remember the time I actually got Don to address the problems currently facing the country. He responded with some parable about a car that explodes if you try to drive it, so don’t try to drive it. And even though an entire continent is trying to keep their economy together, Don has it solved with some simplistic solution based on bumper sticker logic.

But hey, nothing like yet another decades old citation to show you’re up on current events, amirite?

Sam Grove December 10, 2011 at 12:41 pm

Don can’t make you think.

vikingvista December 10, 2011 at 1:08 pm

You can lead a troll to blather, but you can’t make him think.

Greg Webb December 10, 2011 at 1:11 pm

LOL!

Harold Cockerill December 11, 2011 at 8:09 am

No need to lead a troll to blather, the blather is built in. It takes the place of thinking.

Nikolai Luzhin, Eastern Promises December 10, 2011 at 7:44 pm

Don,

The only problem with what you say is that the cause of the crisis have nothing to do with government spending of money.

The cause of the crisis, which was predicted and anticipated, was that, in a currency union, economic activity moves to the economic activity is most robust. Hence, everyone said the Euro would not work and that what has happened would happen. Less competitive countries would experience a further decline in economic activity and, ultimately, fall victim to all sorts of problems.

steve December 10, 2011 at 10:23 pm

“These fiscal crises are the perfectly predictable consequences of spending other people’s money.”

For most of the EU, it was private debt from a real estate bubble. For Greece, it was sovereign debt. However, it was predictable from the beginning because of a shared currency in a union that does not work like a unified country.

Steve

nailheadtom December 10, 2011 at 10:49 pm

“He reckons “crunch time” could be the first half of next year, with Italy having to refinance €36bn of debts in February, €27bn in March and €28bn in April. That is part of a programme that will see almost €400bn of debt issuance by Italy next year – not to mention around €150bn by Spain. Yields on Italian 10-year debt currently stand at 6.8pc. On Spain’s, the figure is 5.8pc. If either stick above the bail-out alert level of 7pc, eurozone leaders will have to come up with something better than last week’s flim-flam.”
http://www.telegraph.co.uk/finance/financialcrisis/8948173/Eurozone-leaders-duck-all-the-big-issues.html

Harold Cockerill December 11, 2011 at 8:16 am

This is what comes of substituting borrowing for production. Are any of the southern European countries in a position to raise production to the level required to justify bailing them out? That has to be the question the German voter answers in the affirmative for there to be any hope of saving the Euro. I would be hard pressed to believe the Greeks and Italians can change their character. This looks more like Rubik’s Grenade. I don’t think they’ll solve it before it blows up.

Jim December 12, 2011 at 2:14 pm

The unfunded liabilities facing western nations and the declining marginal utility of debt suggest that if Keynesian stimulus works at all, it probably only works under a small set of conditions; eventually the rules of finance takes over regardless of the size of your printing press. Some folks may like this article:

http://www.leisnetwork.com/2011/12/complexity-financial-crisis/

It speaks to the post.

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