May 15, 2002

Since the first Bush budget began being implemented in October, inflation adjusted government spending has jumped by an annual rate of more than 11 percent.  At the same time, tax reductions have added more than $130 billion to household savings.  The latest stimulus package is adding another $20 billion in extended unemployment benefits and a like amount in recaptured corporate tax payments. 

In short, we are experiencing the largest surge in government economic stimulus since LBJ and his guns and butter.  With tax cuts and the war on terrorism, we have changed the form of how the guns and butter are distributed, but the similarities far outweigh the differences. 

An economist has no business determining how economic agents should spend their resources.  This is a matter of tastes (or needs) that are beyond the scope of economic analysis. 

There are procedures that governments should use to determine whether they should extract resources from the economy--procedures that no government I know currently follows.  However, spending for a war on terrorism or on home defense or even to shore up levies or build highways or insure profitable agriculture requires more political than economic judgment. 

In short, I have no business saying that this largest expansion in government since LBJ is appropriate (except as a citizen casting my vote to support those with positions on government spending).  However, as an economist I cannot ignore this largest increase in government in nearly 40 years. 

Before I go forward, someone might ask what is the correct procedure for determining whether government should be spending and how much.  The concept is easy.  Can government provide more value for its citizens than the private economy is doing for the last dollar it is using in each of its activities. 

The reality is much more difficult.  Should I take away your ability to hire a new employee so that a child that otherwise would have limited opportunity gets a quality education?  Is it the role of government or private charity to see that children have opportunities? 

Issues like externalities and social goods justify some extraction of private resources for public uses, but where are the diminishing returns that should limit the size of these efforts?

Nevertheless, when government uses a resource (however financed), it is pushing away alternative uses for that resource.    Ultimately, evaluating the relative merits of that resource's use is what should determine how many resources government should have. 

How to finance the access to those resources must be (but never is) a separate question.

All of these are important points in evaluating whether this large government intrusion into our economy is justified.  (Looking at the political support, one wonders whether America expected to see the largest increase in government intrusion in 40 years). 

The war on terrorism and home front security clearly are new initiatives that were required by events.  Their size might be debated, but their existence needs little justification.  However, should not some other parts of government be crowded out along with private activity in providing those resources. 

Yet, there is little evidence that any segment of government has taken any reduction to release resources for the security initiatives.  To his credit, Secretary of Defense Rumsfeld appears to be restraining the growth in some military initiatives to finance the terrorism effort.  Unfortunately, others in the Pentagon assume that any war means more, not less, spending on other military initiatives. 

There has been little restraint in education, transportation, energy, agriculture, or health spending.  Indeed, one is hard pressed to find what government resources have been restrained to help release resources for homeland defense and the terrorism effort. 

I am aware that some of my economic colleagues will argue that we are ending a recession where the alternative use of those resources was non-use.  This is the Keynesian argument that the cost of government growth could be nearly zero in an exceptionally weak economy. 

But such an argument must conclude that when the private economy recovers and  has better use for those resources, the pyramid building should stop and the resources should be returned to private use.  In other words, if this growth in government is for Keynesian stimulus purposes, then the next government budget must be substantially restricted to release resources back to an expanding private economy. 

Somehow, I don't think that will happen. 


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