Reply To: Need help answering this guy: Rich taxes & deficits


First, he seems to suffer from a mercantilist fallacy, that money is wealth or spending equals prosperity, which is the Keynesian version of the fallacy. Prosperity depends on our physical productivity (which depends on our resources, technology, capital capacity, labor skills) and not at all on our aggregate spending.

He gives no account to how the market adjusts to changes in people’s demands. If people’s time preferences fall and they reduce their consumption spending (save) in order to increase their investment spending, then resources would shift out of producing consumer goods and into producing capital goods with no ill effect on the overall economy. If people increase their demand to hold money and therefore reduce both their consumption and investment spending, then prices of all goods, both of outputs and inputs, will decline. The smaller amount of aggregate spending will still be sufficient to buy all the goods produced. The profit of production processes will be unaffected.

Second, he denies scarcity. He claims that government spending creates more total employment (and presumably, more materials and more machines and more factories for the workers to work with). In reality, resources shift away from other alternatives and so there is no net increase. Even in depressions, there are reasons why owners of producers goods are holding them back from immediate employment in order to put them to other employment in the future. Robert Higgs has a famous paper on this point:

Total spending on infrastructure is a fraction of the government’s budget. In 2011, the federal government’s spending was $3,600 billion. It ran a budget deficit of $1,300 billion. Spending on infrastructure (highways, streets, transportation, power, water, and sewer) was around $130 billion.

Moreover, infrastructure projects are notoriously wasteful. If half the money government spends on infrastructure is wasted (paid to workers to stand around watching) how does it make us more prosperous? Private entrepreneurs could have produced goods twice as valuable with the same money expenditures.

Third, he denies the economic theory demonstrating the efficiency of entrepreneurs making production decisions and the inefficiency of government bureaucrats making production decisions.

He misdirects attention from the primary to the secondary effects of debt. The primary effect of debt financing of its expenditures by the government is that command over resources is transferred from private hands to the government right now in the present when the debt is sold by the government. Decisions over the use of resources are no longer made by private entrepreneurs but by government bureaucrats. Prosperity suffers. The secondary effects of who winds up holding the debt and what happens when the debt is paid back are less important.