Thursday, April 19, 2012

Government is not a household. It's not a business either.

Some wine magazines will advise us on what wine is best with various meals (Sauvignon Blank with veal, perhaps, or a good Chianti with fava beans and liver); other less formal sources may advise us on what wine is best with various events (a fine burgundy with chamber music, or well seasoned rose with a cold night spent under a bridge).  Here we concern ourselves only with which wines produce the best blog entries.  Tonight's entry is produced with the aid of a pretty darned nice Chardonnay from the 14 Hands winery in Washington State. 

Really, I can't begin to finish this topic in one blog entry.  But it does begin to look at the kind of thing I had in mind when I started this blog in the first place: the often silly things that politicians of both parties say about economic events and the economic world.  In this case what I have in mind is the odd view that politicians have (or think we have) about what government is.  They say: "families all over this country are tightening their belts, and it's not unreasonable to ask the government to tighten its belt too."  Or "we need to run the government more like a business."

Lord!  Amiytee!  What fools these un-Chardonnayed mortals be!

When families in the country are tightening their belt, that is absolutely NOT THE TIME FOR THE GOVERNMENT TO DO THE SAME!!!  This is basic.  Basic.  Basic, basic basic.  Neither I nor my Chardonnay can express how basic this is.  I don't have to unleash a Dynamic, Stochastic General Equilibrium model to express this; I don't even have to show my age by referring to IS-LM.  If demand from households collapses, businesses will not invest, because (see prior entries of this blog), businesses are driven by their confidence in the presence---future presence---of those magical creatures called "customers".  If neither investment nor consumption are providing customers for businesses, the only customer left standing is government.  If at this moment of demand vacuum government chooses contract its purchases then nothing stands between prosperity and the current condition of, say, Spain.  It is precisely when families are having to tighten their belts and as a result businesses are backing away from investment that government must spend.  When consumers are on a buying spree, and businesses, inebriated with the strong drink of plentiful customers, are bursting with irrational exuberance, THEN government should stand to like a champion, grit its teeth and tighten its belt, and store up its funding for harder times.   

Why is this a hard concept to understand?

And government is not here to make a profit, or maximize its bottom line.  Businesses are driven by that.  Businesses are beset by competition, both from other companies in the same industry and by competing industries, and must work hard, strive hard, by improving their products and identifying needs, to make their way in a difficult and starkly competitive world.  The have to make a profit, and quickly.  There is a great river of economic research on how this competition benefits households, who consume the product of businesses efforts.

Government has no competition within the country it governs; it does not (and should not!) promote one business over any other.  Competition among businesses creates efficiencies; lower prices; clever new products that households need.  Government does none of that, really.  But rather than creating clever products, government can move to create or protect whole industries, whole sets of industries based on a single resource, or on basic research beyond the interest of any single business. Government created the research that produced computing chips; Apple and IBM and many others created personal computing, word processors, calculating software; eventually Apple created the iPhone and others flooded into that market.  Government created the internet structure, ARPANET, DARPANET and the TCP/IP protocols that make the internet hum; google created a search engine scour the internet for your interests and transport them to your living room couch.  Government created the opportunity---through massive public financing and land grants---to create a rail system throughout the country, but Union Pacific and Central Pacific took the opportunity and found the routes to make that real.  Government created NASA and the space program; government created radar, satellites, GPS, jet engines, nuclear power, microchips, synthetic fuels and alternative energy; all the massive variety of spinoffs from those things that created or supported industries were the work of private business.  These are very different functions. 

Business works for its shareholders---if it is a broad minded or long-visioned business, it may be concerned with its the real welfare of its customers; if it is a big hearted business it may be concerned with the welfare of its employees.  Government works for the welfare of the whole country, and for the welfare of citizens of every age and interest, and even for citizens not even born yet.

Households consume, for their own purposes, the products that businesses create for their own profits.  Government provides the legal environment, the security environment, the public goods, the long societal vision, the basic research, the grand infrastructures, the dams, the rail systems, the highway systems,  the transportation and communication networks, that allows these two actors in the economic world to act together to everyone's benefit.

I know this is a new blog, and no one is out there reading this.  But I'm not finished with this topic, and I'd love to hear other ideas.  Speak up.  I'm listening.


  1. testing testing...does the comments widget work? It seems to work in other blogs...

  2. Dear Noctural Economist:

    A carpenter sees the solution to a problem as being a hammer, a plumber a wrench and a businessman another business.

    An interested reader

    1. And so they should. But the government is not a hammer or a wrench. The government is a government.

    2. And there's still nothing in the "recent comments" widget. sigh...I guess I have to get to Google to ask them about this.