It’s Not About Money, and the Country Isn’t Broke

I just encountered a peer-reviewed scientific paper whose authors announce, as their centerpiece finding, that because they couldn’t show A to be correlated with B at a 5% significance level, A is therefore uncorrelated with B. The correlation coefficient in their sample is about .2. This error is at the Stat 1 level; wrongwrongwrong. So is a lot of the depressing, and dangerous, nonsense about government debt and stimulus being put about by people claiming to be economists. What real economists say passes a sanity test, even when it’s complicated and often when it’s surprising. Choose wisely.

Here is how to think about the deficit and the economy.

First, it’s not about money, nor about “how much the government owes” people or governments, except in a very secondary way. It’s about use and waste of economic resources, resources we typically compare, measure, and aggregate using their money prices. This aggregation is quite convenient, and money is useful, but value is no more made of money than a house is made of inches. Never stop asking questions about a proposition in economics until you have got through the money to the real resources and understand how they are being used.

Nor is the government sector of a nation like a family that has to “live within its resources.” If you like household analogies, you can make one, but not the one deficit alarmists and conservatoid pols wave around. Try this: it doesn’t have any money in it at all. Think of the entire nation as a family that lives on a farm, and one that has delegated everything to do with food to Dad. Let’s call what he does the Nutritionment. Mom does everything else, like house repairs, making clothes, and fixing the car and tractor. After school the teenage kids earn some money in town; it turns out to be more efficient to do this and buy coffee and chocolate from the outside world than to try to grow those essentials in Vermont. After dinner everyone washes the dishes together. In this economy, as in any economy, the fundamental economic resources are people’s time and the capital equipment they have to work with, and the name of the game is to waste as little as possible of them.Until recently, Dad’s time has been sufficient to feed everyone but since the birth of new twins, not so much, especially since one of the burners on the stove stopped working and his favorite saucepan wore out. Furthermore, Mom has had a fair amount of time on their hands since the family has been buying wash-and-wear clothing and she doesn’t have to iron, and one of the teenagers was just laid off at the soda fountain. Winter is coming and their warm clothes are outgrown/worn out. The family has an emergency meeting: “We’re going broke!” “What we need is for Dad to stop wasting his time making broccoli, I hate broccoli.” “Yeah, the Nutritionment is too big and I don’t like a lot of what it makes!”

Some alternatives are laid on the table:

(1) Stop helping Dad with the dishes, so the parasitic Nutritionment will use up less labor. No-one has any clear idea of what they will do instead, but Mom is sure that if only she didn’t have to dry silverware in the evening, she would be able to find something useful for the laid-off teenager to do in the afternoons.

(2) Have Mom and the idle kids work with Dad enlarging the henhouse .

(3) Have them learn to knit and make some sweaters for everyone.

(4) Have them spend some time teaching the twins to read and write and collect eggs and weed vegetables.

You have to be a special kind of idiot to think what this family needs is less resources creating nutrition, and for Mom and the kids to go on wasting even more time doing nothing. You probably think options (2) and (3) make a lot of sense, because they would wind up with more free time (for piano practice, or surfing the web, or making gourmet cheese) after making those investments in physical and human capital. Even if they have to get Mr. Chen’s Carpentry and Needlework Emporium to spot them some lumber and yarn in return for eggs and nice sweaters in a few months. You would probably think that a teenager who refused to do (4) by saying, “teach the twins? I already know that stuff; they won’t do any of it for me before I leave home. Forget it!” was missing a couple of cards from his moral deck. You would probably think this even if the only way to make it happen was to vote Dad the power to draft people for these projects, and even if the sweaters weren’t going to be useful until November.

This family isn’t broke, it’s stuck in resource-allocation habits that don’t work any more and need to be changed. The Nutritionment is ‘broke’, but only because everyone decided to make it so. And the waste that’s making them poor isn’t Dad experimenting with Cordon Bleu recipes, it’s Mom and the kids, sitting on their hands, unable to create value unless the family organizes them to do so.

If you disagree with everything in this post, then you have a future as a speechwriter for Richard Shelby or a toady for Grover Norquist, or maybe a ventriloquist’s dummy at a Tea Party party, and my sympathy. If you think it makes overall sense, you are a Keynesian; deal with it.

[Cross-posted at Same Facts]

Michael O’Hare

Michael O'Hare is a Professor of Public Policy at the University of California, Berkeley.