US Government Spending Like a Sailor in a Brothel

kennyboy66_2

Generali wrote: »

In what way is it simplistic, please? I thought there was very little controversy surrounding the existance of crowding out. Perhaps I'm wrong.

Who denied the existance of crowding out ?

You implied that for every $1 of government borrowing, it reduces private sector borrowing by an equal amount.

Some reasons that it is simplistic, but far from an exhaustive list.

1) It depends on whether the economy is at full capacity or in a deep recession.
2) Some of the current deficit is effectivly being financed by printing money.
3) It depends on how wasteful government spending is.
4) It depends on how "productive" private sector investment is. I doubt that the vast swathes of flats built all over the UK would be described as a model of productive capital allocation.
5) It depends on whether Govt spending expands (or reduces the contraction) of the economy.
6) It depends on the multiplier effect of number 5 above.
7) It will depend on the inflationary or deflationary environment.
8) It assume that demand for money is perfectly elastic.
9) It will depend on people expectations of what will happen in the future.


The theory is sound, the idea that in practice that it happens $ for $, at all stages of the economic cycle and all circumstances is laughable.

Generali

kennyboy66 wrote: »

Who denied the existance of crowding out ?

You implied that for every $1 of government borrowing, it reduces private sector borrowing by an equal amount.

Some reasons that it is simplistic, but far from an exhaustive list.

1) It depends on whether the economy is at full capacity or in a deep recession.
2) Some of the current deficit is effectivly being financed by printing money.
3) It depends on how wasteful government spending is.
4) It depends on how "productive" private sector investment is. I doubt that the vast swathes of flats built all over the UK would be described as a model of productive capital allocation.
5) It depends on whether Govt spending expands (or reduces the contraction) of the economy.
6) It depends on the multiplier effect of number 5 above.
7) It will depend on the inflationary or deflationary environment.
8) It assume that demand for money is perfectly elastic.
9) It will depend on people expectations of what will happen in the future.


The theory is sound, the idea that in practice that it happens $ for $, at all stages of the economic cycle and all circumstances is laughable.

I implied (or at least tried to) that Government borrowing reduces funds available to be borrowed by the private sector not that it reduces funds borrowed by the private sector*. A subtle but important difference.

The way I see it is that a lot of the problems in the UK economy are caused by the property bubble meaning that much investment has been 'misdirected' into either building new properties or into doing up old ones. What is now needed is for new investment to be directed into increasing the potential GDP of the UK. If the Government borrows huge amounts it reduces the availablity of funds for the private sector to invest. To make matters worse, the future costs of servicing that debt will reduce the profitability of doing business in the UK and so perminently reduce the level of business activity in the future.







*This is because lending = savings. Economists like to say investment = savings but that's wrong IMO.

sabretoothtigger

Sounds reasonable on a basic level that all debt and bonds compete for backing and government can saturate demand

Generali

sabretoothtigger wrote: »

Sounds reasonable on a basic level that all debt and bonds compete for backing and government can saturate demand

That's the crux of it. There's nothing special about a Government borrowing money that magically means that people are saving more to lend elsewhere.

CLAPTON

sabretoothtigger wrote: »

Sounds reasonable on a basic level that all debt and bonds compete for backing and government can saturate demand

there are two other factors worth considering

a. there is no fixed amount of money that is being competed for... i.e. the government can directlty alter the amount of money available for lending by printing more... effectively with QE that's what they are doing.

b. secondly it depends very much what the general state of ther econpomy is and what the government is doing with the money.. if as at present the government is trying to boost demand and prevent further falls in employment then this may have the effect of increasing the amount of money available for borrowing and not decrease it. (basically umemployed people don't save and the governement has to borrow to pay umemployment benefits.)

Wookster

CLAPTON wrote: »

there are two other factors worth considering

a. there is no fixed amount of money that is being competed for... i.e. the government can directlty alter the amount of money available for lending by printing more... effectively with QE that's what they are doing.

Are you suggesting that the money supply is unlimited and that simply by expanding the QE program, that the monetary base can be expanded, with no apparent limits?

How about the side effects of a QE program?

CLAPTON

Wookster wrote: »

Are you suggesting that the money supply is unlimited and that simply by expanding the QE program, that the monetary base can be expanded, with no apparent limits?

How about the side effects of a QE program?

I'm saying the money supply is variable and not fixed... which complicates apparently simply arguments about financial crowding out.

Clearly there may well be side effects of expanding the money supply either beneficial or adverse.

If the money supply expands above the rate of growth of real products and services then inflation is a likely consequence... hence you will have seen reference to hyperinflation on the boards although we seem a little away from that at the moment.