Wednesday, May 27, 2020

Government spending: a better way to stimulate the economy than encouraging private borrowing.

A big problem in the economy is too much debt. Easy credit encourages people to do things like buy more expensive houses. Encourages businesses to do things like buy each other out. This drives up the cost of these things.

Then the monthly payments are so high that there is little left for a rainy day. Little left for discretionary spending. People living check to check with debt payments and rents taking up most of income. Then the virus comes and there's no cushion.

Low interest rates have encouraged people and businesses to spend and increase their debt. This has led to a huge debt overhead which eventually puts a damper on things due to the burden of paying back the debt. Increased property values and the rents to sustain them has become a burden. It makes us less resilient to things like the virus shutdown as the debts, rents and mortgages continue. We don't have enough flexibility and cushion.

I think most of the reason why they have had to print so much money, over recent years, is to keep the federal government solvent. Republicans have cut taxes, but they can't really cut spending. They keep increasing spending on the military.

Republicans tend to want to cut domestic spending, but that isn't easy to do as people's lives depend on expensive domestic programs; such as Medicare. It's easier to cut taxes than to cut spending.

Without "pay as you go" tax revenue, it's easier to just add to the federal debt. Eventually the debt gets so big that printing new money is the easiest way to sustain it.

The other reason why money gets printed is to stimulate the economy with low interest rates for job creation. Some of this isn't necessarily bad. As the economy expands, more money is needed.

One problem is that Republicans tend to favor low interest rates for private market solutions, instead of government spending, to stimulate the economy.

I don't mean to just pick on Republicans, but they do tend to favor private market solutions. This means stimulation via low interest rates encouraging business to expand rather than stimulus from government spending.

Individuals and business accumulate crushing debt burdens if credit becomes too easy. In the long run, this crushing overhead can sink the economy; unless we print more money for bailouts.

Now days, there is even talk of a debt jubilee.

The government, itself, seems to be able to get by with going into debt more easily. Maybe because it can print money. The consequence of printed money is more indirect. Rather than immediate default, the consequence of printing money is long term inflation. It's inflation caused by more money chasing the same number of goods and services. This benefits some folks, like a lot of property owners as the value of their property goes up.

I would guess a better way to stimulate the economy, with new money, is through government spending, rather than encouraging private debt.

I may sound a bit socialist. I do think private enterprise can be more innovative than government. Private enterprise can accomplish things; like solar power, but the marketplace, doesn't necessarily do this on its own. The marketplace needs a boost from government spending. Government as a consumer of private enterprise.

This has worked well for the relationship between NASA and Space X; for instance. Private innovation for space launch, but lucrative government contracts, to supply the International Space Station, as a customer. This has helped Space X get started.

Without some direction from government, the private sector can flounder. The private market, by itself, isn't likely to develop things like solar energy; that is until the price of solar comes down lower than fossil fuel energy. Things like solar energy need a boost from government to get the ball rolling.

One can say that private enterprise as a way to organize a workplace works well much of the time. Often better than government bureaucracy. It's the private marketplace that's more the problem. The market doesn't always favor the things we need; especially when taking the environment into account. It tends to favor our impulse buying over our long term needs.

To a large extent, private business needs government as a responsible consumer.

No comments: