I wanted to comment on the graph above, sampled from this post at the blog of the Financial Times. The graph illustrates the trend in spending by state and local governments and a projection of their future spending based on trend. I’ll put my observations into the form of question and answer.
Why has spending by state and local governments slowed?
Unlike the federal government state and local governments need to balance their budgets. When revenues flatten or fall, so will spending. State and local governments derive their revenues from taxes and by and large tax revenues depend on three things: personal incomes, retail spending, and real estate values. If those things rise, so do state and local government revenues. If they don’t, they don’t.
When their revenues flatten or fall, so does their spending.
Isn’t that a good thing?
How you answer the ideological question implicit in that is up to you. It could be a good thing if the shortfall in spending were made up from somewhere else. What I care about is the reduced economic activity that has caused the decline in state and local government revenues and the future decline in economic activity that will result unless the difference is made up somewhere.
What if the difference isn’t made up?
If the difference isn’t made up, there will be less economic growth than there would be otherwise. Lower incomes, less retail spending, fewer jobs.
If the spending needed to produce economic growth doesn’t come from state and local governments, it must come from the federal government, from personal consumption, or from business investment. There isn’t anywhere else for it to come from.
There is little or no actual evidence that the painfully slow recovery in employment that followed the 2007-2008 Great Recession has been due to technological unemployment. If you think it has, fine. Produce your evidence. In the absence of actual, hard evidence of technological unemployment, your impressions or that it stands to reason aren’t enough. You’ve got to have actual evidence to convince me. Because there is actual evidence of other things producing unemployment. Among those things are our perversely importing workers from other countries and drastic distortions in our economy.
What kind of distortions?
I’ll just mention three: financialization of the economy, overinvestment in health care production, and overinvestment in education production.
What’s wrong with spending on the health care and education sectors?
Nothing. If those sectors were actually increasing production. We now spend more than twice as much in real terms per capita on health care than we did 35 years ago and three times as much in real terms per capita on education than we did 25 years ago with extremely meager evidence of actual increases in production in either sector.
When you pour money into things without increasing production, it results in deadweight loss.
IMO what’s actually happening is an enormous increase in deadweight loss resulting in lower economic growth than would be the case otherwise. And increases in income inequality.
What’s wrong with financialization of the economy?
Once upon a time when people invested, it meant that they built factories, started businesses, prospected for gold or did something that employed more people. Now it means that they invest in financial instruments which doesn’t result in much of an increase in employment.
It also results in an enormous concentration of wealth, particularly in the financial sector.
I’ve cited the statistics often enough in the past. There is an optimum size for a financial sector relative to the rest of an economy. We passed that optimum decades ago.
How did that happen?
Two ways. First, we’ve been buying stuff at a discount from China and they’ve been taking the dollars they receive in trade and investing them in financial instruments. That has increased the size of the financial sector all by itself. But that’s not all.
We’ve been subsidizing all three of those distorting sectors enormously. Over just the last nine years we’ve subsidized the financial sector to the tune of trillions of dollars. The subsidies to the health care and education sector are in the vicinity of a trillion dollars a year each. Note that I’m using the economic definition of “subsidy” here rather than some politicized definition. It means spending that would not otherwise have taken place.
What do we do about it?
It’s like that old burlesque comedy routine.
Patient: Doctor, it hurts when I do this (throwing himself into some sort of contortion).
Doctor: STOP DOING THAT!
Health care for the poor would not have occurred w/o govt spending. I am not sure it gives us a useful concept to think of it as a subsidy.
Steve
Over just the last nine years we’ve subsidized the financial sector to the tune of trillions of dollars.
This is why Sanders’ campaign resonates. If he were a better campaigner, or just a more likable person (still worlds better than a Hillary or a Cruz, for example, but not without his problems), he’d be doing even better.
Add student loan debt and you get the effect of lower spending on real things as income is diverted to deleveraging.
I really don’t understand your point in the first section of the post. That trend line is ticking up at 5.5% per year in real dollars. That’s basically double the growth in GDP, and not sustainable forever, as some of us have pointed out for quite some time. When the balanced budget constraint is considered the reality of the funding side becomes apparent. Higher tax rates, additional taxes and fees, and a credit and demographic driven real estate boom have funded it by taking more dollars from one set of people/taxpayers and redistributing it to another set of people/taxpayers, variously called government workers, crony capitalists, teachers, etc etc. But no purchasing power has been destroyed, per se. The only real ideological point is whether one believes the best use of the dollars is the public or private sector, and which makes the better net consumption or investment decisions. I think people know where I stand.
In the second part of the post, no one likes concentrations or distortions, but all seem to derive from government policy. That should not surprise people. As for financialization, I have recently read three articles, generally quoting academic studies, describing all the horrors – mainly current slow growth – of financialization. They all put up the same graphic showing the growth in insurance, securities and credit products……………..which makes a basically straight, ascending slope line starting in the late 1940s before flattening in 2008 to the present. They then go on to variously blame financialization “starting in 1980” or “starting in 2000” for slow growth due to lagging R&D or engineering and product development, corporate raiderism and all sorts of other convenient scapegoats without even considering the irony of their graphic and how it is at odds with their tale.
If you wanted to take one single action that would reign in credit risk taking and too big to fail it’s right in front of our faces: make originators hold all, or more realistically, a majority (at least a significant portion, like a third) of their originated loans on their own balance sheets. But Bill Clinton signed off on its repeal and I’m taking a wild guess that those speech transcripts that Hillary won’t release aren’t impassioned pleas to reinstate it.
It’s a problem of distributional effects. The more concentrated incomes are the lower velocity becomes and the more slowly overall incomes grow. This in turn creates unemployment which means greater spending by the states as they are forced to take on mounting social burdens. Poverty and unemployment are much more expensive than the alternatives which makes us more reliant on government spending for growth.
If we really believed in limited government we’d support a full-employment policy.
This really is backwards. At the state & local level, less government spending is an more of an effect of lower economic activity, and less a cause of it.
We have a natural growth rate. Certain government expenditures enhance economic growth (contract enforcement and prohibitions on malum in se activities come to mind) and certain government expenditures reduce economic growth (government picking winners and losers on non-economic grounds comes to mind). All government activity is a mix of these two categories of action along with the odd neutral (a bill naming a street). Examinations of government spending that do not differentiate the helpful from the unhelpful spending will always result in pretty graphs that are only coincidentally related to reality.
Much of the difference between enhancing activities and retarding activities resides in the distinction between public goods and private goods. Prohibitions on malum in se activities, just to cite one of your examples, are public goods. A stable currency, the rule of law, a sound banking system, etc. are all public goods.
Public health measures are a public good. Other health care expenditures are private goods.
. . .,
That’s my point. When activity slows (expressed as velocity) government spending is the only place you’re going to make it up. Hence we become more dependent upon it and because revenues fall and states have balanced budget requirements the result is spiraling unemployment.
TMLutas,
There is no such thing as a natural rate of growth.
Ben, I think you forgot the
MIC DROP
at the end. 😉
We do not suffer from a shortage of public goods expenditures. We suffer from excessive non-public goods expenditures.
Financialization of the economy is a monetary phenomenon. The outgrowth of the financial industry is a symptom not the cause. The credit backed monetary system is the cause.
It occurs when companies borrow money and use it to buyback their stock rather than invest in their production capabilities. It occurs when the government encourages unqualified people to borrow money for houses they cannot afford and when the government provides or backstops large pools of money for that purpose.
The economic expansion is an illusion, and when the inevitable overwhelming disturbance occurs, there is no foundation to support it. The house of cards built by the credit Ponzi scheme collapses, and we get 2008 or the Great Depression before it.
Blaming Wall Street and the rich for the country’s woes is a little silly. What exactly did anybody think they were going to do with all the money thrown at them. It is like the King of England acting surprised upon learning of the murder of the Archbishop of Canterbury. What did he think would be the result when he cried, “Who will rid me of this troublesome priest?”
If you want to bring the rich to heel, stop allowing them to create money, but you had better be prepared to see your beautiful welfare state crash and burn.