Archive for March, 2010

A FORMULA FOR GOVERNMENT SPENDING

Saturday, March 20th, 2010

Some bright economist ought to give us a formula with which to analyze how much wealth and income can be taken out of the productive economy and used to deal with non-economic needs in a society. It seems obvious that any country has enough wealth to do a bit of non-economic investing, such as defense, justice systems, and welfare. The issue is to define the “sweet spot”.

While any country can do a bit of investing to satisfy other needs, it also seems logical that for each country there is a point at which such investing takes enough resources away from the productive economy that not only will the productive economy decline, but with this decline the availability of monies to do those unproductive but necessary things will shut down as well. This is what I call the “sweet spot”.

It is a complicated and, for that reason, a fun problem. For one, you could not create this formula with an analysis fixed in time, as governments seem to be good at borrowing against the future. So you would have to consider the cumulative effects over time, and the sweet spot would be defined not only as a per cent of GDP and a per cent of accumulated wealth, but also as a place in time in the future.

A second interesting consideration is how much of the non-economic funding is to be done by government vs. by the productive (i.e., private) sector. This would involve a whole sub-formula, it would seem, and a “loop” that analyzes whether to maximize the public or private sector funding of these needs first, using the other source as an alternative once the primary source stops growing.

But what a great tool it would be! We could see when things are projected to shut down per the formula, and then just argue about the assumptions shaping the inputs. I see that as a lot more clarity of discussion than we have now in our society. And that would be good!

Jim Hirshfield