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Tyler Cowen on Government Spending


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February 13, 2006

Tyler Cowen on Government Spending

Michael Mandel

Tyler Cowen has an item titled Do future generations pay for deficits?. He starts off this way:

Assume that government spends some money today on consumption. That money could have been spent on a durable bridge, but it wasn't. Some current people benefit from the consumption and future generations get nothing.

Above and beyond that effect, do future generations bear the burden of deficit spending?

But of course, there's a big problem with his scenario. The latest budget pegs the FY 2006 deficit at $423 billion. But federal spending on major physical capital, research and development, and education and training--all long-lived investments--is estimated at $425 billion.

We are not borrowing to finance consumption, we are borrowing to finance long-lived investments.

So a better question might be: Do future generations benefit enough from these investments to justify the cost of the borrowing?

12:00 PM

Fiscal Policy

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It's hard to answer your question because it's based on the assumption that the "borrowed" $423 billion is going to infrastructure and education. I drive to work on crumbling roads. I watched a major power outage occur less than three years ago that left the northeast in worse shape than many third world nations. I watch my girlfriend and friends work at a major research university on "research" that only exists because major pharmaceutical companies are funding this allegedly-objective research. I see college graduates entering the workforce for lower and lower wages; or entering the workforce in retail jobs they could have had without wasting time with five years of college. And speaking of college, I watch the Republican Congress cut billions from the financial aid programs while sending money home to pork barrel projects in their own districts. No?? that $423 billion isn?? being invested in anything.

Posted by: Brandon at February 13, 2006 03:42 PM

At least Cowan understands that there are two sides to a balance sheet, which is better than most commentators who focus only on the debt and ignore assets that it is being used to acquire, even when these are hard assets like bridges, dams, and air traffic control radar ssytems.

The problem with counting intangibles as investments is the difficulty of assessing which of them are really long-lived value creators and which of them are just money down the drain. Consider, for example, the school systems that absorb money while passing students from grade to grade...and then it turns out that the students really haven't been learning much. There's an example linked below. If the cost of educating these kids had been capitalized, and GAAP were followed, then a massive writedown would need to take place.

http://www.joannejacobs.com/mtarchives/015996.html

Posted by: David Foster at February 13, 2006 04:27 PM

Are you joking? Man you need to back out of this one quick, b/c that's the oldest logical flaw in the book. You can't just pick one particular chunk of the total budget and say THAT's the incremental part that is debt-financed, so as to support your argument.

C'mon dude, I was beginning to think you were smarter than the typical journalist.

The total budget is what, about 2.7 tril? The expected deficit is about 1/6th that.

The budget needs to be considered as a whole to be intellectually honest here. The only logically sound way to approach this problem is to recognize that one-sixth of EVERY dollar, every program, equally, is debt-financed. The fact that "long-lived investments" approx equals the deficit is literally mere coincidence.

Your thinking leads to silly false quibbles based on one's biases: "Military spending causes the deficit! No, Entitlements cause the deficit! No, Education causes the deficit! No, Treasury debt servicing causes the deficit! ----"

This is elementary school logic my friend, I hope you see that.

That spanking aside, I don't worry much about saddling future generations with debt or about the effect on them of our deficit spending. We're also saddling them with astronomical assets (no one ever thinks about that side of the balance sheet); we're curing their diseases for them, we're inventing their Internet for them, we're building up a priceless infrastructure of institutions, laws, economic framework, etc etc.

Even our spending money on trivial crap, as long as it is someone's free utility-seeking preference, contributes to improved productivity as a result of economic organization.

The kids will be a lot richer than us; and anyone who doesn't recognize that needs to spend a few years contemplating economic productivity and indifference curves and a bunch of other concepts.

Posted by: Kevin at February 13, 2006 09:27 PM

It is tough work spending all those asian savings, but we are up to the task.

Posted by: Lord at February 13, 2006 11:42 PM

Lord...how right you are. We are world champs.

Posted by: Mike Mandel at February 14, 2006 08:05 AM

Kevin..

Dude? dude? Hmmmph...

Sure I can pick out one chunk..if it's the part which is long-lived investments and should be matched against long-lived borrowing.

And I very much agree with the second half of your comment. This whole debate, really, is about whether our kids will be richer than us or not.

Posted by: Mike Mandel at February 14, 2006 08:08 AM

Where does that $425 b figure for Federal investment come from? Does it reflect depreciation? Methinks you overstate hugely.

Posted by: Max Sawicky at February 14, 2006 12:36 PM

Hi Max,

The $425 billion figure for federal spending on major physical capital, research and development, and education and training comes from Chapter 9 of the Historical Tables for the 2007 budget

(http://www.whitehouse.gov/omb/budget/fy2007/pdf/hist.pdf)

Posted by: Mike Mandel at February 14, 2006 12:50 PM

You know, I am really very ignorant when it comes to macroeconomics. Maybe, there is such thing as ??nowledge economy?as lot of you seems to believe. However, if that is true, how come we do not see that in our current balance sheet? Why is it that our consulting icons like McKinsey, BCG, etc., are not hiring armies of MBA’s and bringing billions of dollars in revenues from overseas selling our expertise in organization, marketing, management, etc.? How do you explain that some people believe that demise of the Detroit is brought about due to inept management, poor engineering, and failed marketing strategies compared with their Japanese competitors? Are not those exactly the kind of areas where American “knowledge technology” is supposed to excel?

Well, the point that I am trying to make here is that really there are too many unanswered questions to take the notion of “knowledge economy” seriously. What is even more unsettling is that more and more of the “knowledge economy” has moved overseas as well. We have all but conceded the software development, but now we can see that even such areas as pharmaceutical research or stock analysis are finding their way out of this country.

Again, that does not have to be bad itself, but the fact is that we are selling those things (now with value added manufacturing, research, and engineering) really mostly back to ourselves. If we were selling that outside of the USA we would again see that on our balance sheet, and see it big time – as, for example, $50 for manufacturing and software development of iPod out to Asia and $300 back to the US from Europe or Japan for selling the final product. If we were truly so good in the knowledge economy we should be really running huge surplus. After all, we would need to sell only a fraction of actual goods outside of the country with our huge “knowledge based value added” to buy tons and tons of cheap simple Asian stuff, right?

And, please, do not tell me that investing in factories overseas is example of intangibles that we are really exporting but do not count as exports. The way I see that is that we are investing in someone else’s economy and give them knowledge as a bonus gift. We do get some money back in terms of higher profits that do benefit some of the people here. I highly doubt there is really a benefit to the society as a whole. The way I look at that is that Asian economy will slowly build their economy and internal demand with it, and at that time, they will not need to sell their products to us. The question is what we will be trading with them to get those products then? Correct me if I am wrong, but I somehow doubt that they will be accepting our most valuable asset, American CEO, as a tradable item.

Posted by: pcs at February 14, 2006 01:30 PM

I am a little late to this thread, but there is an element that has not been discussed. It is that there is a certain amount of truth to the rumour that when the government owes debt to itself, it never has to pay it back. This may apply to inter-governmental debt as well, due to political as well as economic reasons.

However, there is a very real debt that is under estimated and has not been discussed here. That is the debt represented by Social Security and Medicare, and this debt represents real obligations to spend real money at some point in the future. Sure, the government can continue to print money, but the difference is that there is some debt that probably never needs to be paid back, but there is other debt (in this case far larger in magnitude) that must be paid.

Posted by: Cyberike at February 26, 2006 10:40 PM


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