The Real Waste: Unemployment

“Wasteful” government spending should be of little concern compared to the ongoing jobs crisis.

Joe Stiglitz was interviewed recently on the ABC national current affairs show 7.30 Report. It’s an excellent interview, which discusses the utility of fiscal policy. You can read the full transcript to see what he said or watch an extended version of the segment.

Money quote:

Interviewer: I’m not sure how much you know about Australia’s stimulus packages in response to the crisis, but to the extent that you do, how did the quality of Australia’s stimulus compare with that in the US and elsewhere, in terms of its effectiveness?

JOSEPH STIGLITZ: I did actually study quite a bit the Australian package, and my impression was that it was the best - one of the best-designed of all the advanced industrial countries. When the crisis struck, you have to understand no-one was sure how deep, how long it would be. There was that moment of panic. Rightfully so, because the whole financial system was on the verge of collapse. In that context, what you need to act is decisively. If you don’t act decisively, you could get the collapse. It’s a one-sided risk.

Interviewer: There’s been a lot of criticism of waste in the way some of Australia’s stimulus money was spent. Is it inevitable if you’re going to spend a great deal of government money quickly that there will be some waste and can you ever justify wasting taxpayers’ money?

JOSEPH STIGLITZ: If you hadn’t spent the money, there would have been waste. The waste would have been the fact that the economy would have been weak, there would have been a gap between what the economy could have produced and what it actually produced - that’s waste. You would have had high unemployment, you would have had capital assets not fully utilised - that’s waste. So your choice was one form of waste verses another form of waste. And so it’s a judgment of what is the way to minimise the waste. No perfection here. And what your government did was exactly right. So, Australia had the shortest and shallowest of the downturns of the advanced industrial countries. And, ah, your recovery actually preceded the - in some sense, China. So there was a sense in which you can’t just say Australia recovered because of China. Your preventive action, you might say pre-emptive action, prevented the downturn while things got turned around in Asia, and they still have not gotten turned around in Europe and America.

Stiglitz is 100% correct. When our critics begin to talk about “wasteful” government spending, it is worth reminding them that there is no greater waste than persistent unemployment. It dwarfs all other inefficiencies. About the bang for the buck, the fact that real GDP only went up by a dime when deficits reached a dollar is a meaningless calculation, yet one hears it all of the time. The right calculation, what amount of GDP reduction was avoided by the government deficit seems more interesting, but it is more difficult to compute and requires some empirical model.

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In fact, in the overall context of government spending, “bang for the buck” is a pretty meaningless concept, as it implies something is given up by the government when it spends. But in reality, the only thing given up is spending that contributes to aggregate demand.

So if the government were to spend by giving the man on the moon $10 trillion and he holds it in cash, and doesn’t spend any of it, the government doesn’t actually use anything up.

By the same token, if there is a tax cut that doesn’t increase spending, nothing was used up, and taxes can be cut that much more until they do increase spending. So in fact, one could turn the tables on the “bang for the buck” crowd and argue that the lower the bang for the buck, the more taxes can be cut, or spending increased. And that’s a good thing!!

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.