Wednesday, June 1, 2011

Fatal Fallacies, Part III

After my lengthy economics discussion on facebook today, I decided it was time to revive the series. Original piece here.

Fallacy 3
Government borrowing is supposed to "crowd out" private investment.
The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone's wealth and ipso facto someone's saving. "Supply creates its own demand" fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.
Think about your own life. If you borrow at a rate of say 3%, and use the money to do something that returns say 5%, aren't you better off? If spending $100,000 on an education increases your pay by $10,000 per year, aren't you ahead after 10 years (not counting interest on the loan)? It is always important to consider he question "What are we getting for our money?" Reflexive thinking like "borrowing is bad" or "spending is bad" is not helpful. Always consider the totality of the circumstances, and how each factor changes the analysis.

No comments:

Post a Comment