Here is an equation with as much importance as E=mc squared. C equals consumption spending, I equals investment spending, G equals government spending and Y equals yearly economic growth. C equates roughly with demand and I with supply creation.
If there is too much C spending there is inflation and shortages, but plenty of sales and profits until stock runs out. High employment rates, high wages and a booming economy can lead to lots of C spending. We like high employment rates and high wages. Lots of borrowing can lead to lots of C spending and inflation. That's why they (the Federal Reserve Board) raise interest rates when there is inflation caused by too much borrowing and spending. If employment rates are high and wages are high and worker productivity is high, meaning we are all working like mad or using new machines that make us more productive to keep supply high, the demand we create by spending won't outstrip supply and cause inflation. If we start borrowing too much and spending/demanding too much we get stuck with inflation. Then there's inflation caused when foreigners raise their prices and/or cut production of oil for instance. So there's a lot going on with the global economy.
If there is too much I spending there could be oversupply, deflation and stock liquidation. Businesses can fail because they have more to sell then there are people to buy their stuff. Of course, if we invest heavily, we create jobs in the supply sector and these workers can spend and increase demand or C spending. It seems like it doesn't hurt to invest too much compared to the inflation and shortages of spending too much, but consider cases like the Mid-America airport about 30 miles east of St. Louis. The people there thought that if "we build it they will come" but that white elephant that the local taxpayers shelled out on sits there without a single airline using it. Similar complaints have been lodged against the Page Ave. extension bridge and the Metro-Link. Perhaps Mid-America and the Page Ave. ext. bridge will be used more in the future when the US population grows and traffic increases on the ground and in the air. Metro has a lot of riders. Then there's the case of the guy who buys a ton of stock, opens a store and gets no customers. What a waste of investment spending. If we spend to much on I and we can't make any sales, then we make no profits and create no jobs. Thus, a proper balance must exist in the economy between C and I. If there isn't enough I spending then there are no new stores and factories or farms and no new jobs, not enough supply to meet demand, not enough economic growth and we have inflation, high unemployment and slow growth. They call that "stagflation" or stagnant inflation. That happened in the late seventies. Interest rates were kept high but it wasn't too much borrowing and spending that was causing inflation. It was not enough I spending, investment and supply creation. Reagan got elected because he proposed "supply side economics" to remedy the problem. His theory was that tax cuts for the rich and big corporations would lead to more I spending and increases in supply. As I recall, the economy did not get better until interest rates were cut because businesses need to borrow to expand and many people need to borrow to spend. So it is all very complex.
Then there is G spending. Government spending has been criticized for creating too much demand and causing inflation. This could be true, but government also invests by building infrastructure that provides a foundation for business and industrial growth. We can see G is a couple of ways:
(C+I) from economic sector A==>by way of G from taxes==>(C+I) to sector B
Government spending based on taxes and liscense sales does not increase the total yearly growth of Y, it just moves it around; it redistributes the wealth, which is fine for the needy and government dependent businesses like the defense contractors and road builders, etc., but it doesn't create any total growth. It can be argued that money redistributed to the poor all goes to C because poor people cannot afford to invest. They only get enough to eat, pay rent and enjoy a little recreation. Defense spending creates jobs, but it doesn't provide consumer goods; however, it does provide national and international security which is essential for a strong global economy. Roads allow commerce. Even so, spending by people on welfare and defense workers will only contribute to C and cause inflation and shortages, unless some of those high paid defense workers and road builders are wise enough to buy stocks and bonds and increase I or investment spending and stimulate supply growth rather than consuming all their pay.
G = (GC+GI)
Government spending has been called inflationary, but it can be looked at as GC, government consumption spending and GI, government investment spending. GC would be office expenses, energy consumption by government buildings and vehicles, defense spending, etc. GI would be considered to be road, dam and bridge building, scientific research, canals, river dredging, and other services that provide a foundation for business. When businesses take advantage of government infrastructure, taxes are collected and the government profits from its investments in infrastructure. Compassionate people would agree, that spending on schools, higher education, health care and welfare programs is GI spending because we are investing in people, and people are what makes everything happen. People are what create every product and service we have today. If we had no computer scientists, where would we be? Are there enough rich people in the world who can afford higher education to supply us with the experts we need to make this technological civilization run? No,
It can be argued that G spending just redistributes C and I and doesn't really add to Y. To a certain extent this is true, but can you really picture a world where all the interstate highways are toll roads and national defense, police and fire protection are privatized? I can see privatization of trash collection, mass transit to some extent and even grade school and high school education with financial aid for the poor, but not much else. Privatization will not be discussed more herein. The best way to do some things is to let the government do it.
G spending is not always aquired from taxes, land leases and liscenses. The government has immense borrowing power. When the government borrows and spends, this increases Y. The government does not always tax and spend. It borrows and spends and this has been going on ever since Alexander Hamilton proposed a permanent federal debt over 200 years ago. We all know how to get ahead by borrowing. The government does the same thing. Unfortunately, the money we save today on taxes will mean more interest we have to pay tomorrow, so tax cuts and borrowing do not seem like the best way to do things; however, if borrowing and spending in the form of GC and GI stimulates the economy we will be richer tomorrow as a result and that interest will be no big deal to pay off. It's like running a business. You borrow money, set up a pizza kitchen, sell pizzas, pay off your debt and make lots of money. Most businesses are financed by loans and not just stocks and bonds. Nobody gets ahead without borrowing in this economy. Today's government is in debt deeper than many people are comfortable with. Everybody carps about their taxes in the USA even though we are the richest people on Earth in all of human history. If we can grow a bigger economy, perhaps people will complain less. If the economy doesn't grow enough, the tax cuts we've had recently are going to cost us a lot more in the future in the form of taxes to pay off the government debt. Clinton created a surplus. I wish they would have used it to bolster the Social Security program. Instead we got some tax cuts under the Bush administration that are going to cost us or our children more to pay off in the future unless this economy grows like hell.
So its important how the government spends money, GC, and how the government invests money, GI. If we need new bridges, dams and aqueducts for irrigation systems this can stimulate commerce. If we spend on too many white elephants we don't stimulate commerce, the money borrowed by the goverment doesn't turn into a bigger economy and more people and businesses to pay for the loans, and taxes are higher in the future unless the government defaults and that will harm banks and US bond owners. As for GC, some miserly people think welfare programs do nothing but increase aggregate demand and cause inflation, but welfare and education is an investment in human potential, so I think it is GI spending.
I wish the government didn't have to tax and/or borrow. If only there were some government businesses besides sanitation and water systems, and public utilities like the TVA. In the old days governments mined gold and silver and sold it to the people. That won't make it these days. I believe South Africa mines platinum and diamonds. What if our government got into the nuclear fuel and reprocessing business? We don't want some countries to have the facilities to reprocess, enrich or separate nuclear fuel because they could make atomic bombs. If they had reactors and let us reprocess the fuel and sell it to them...I think the French are doing that. Perhaps we could do this work on an island in the Pacific to allay the fears of environmentalists, but that might be going to an extreme. Perhaps the government could mine other strategic metals and sell them. As you would expect from me, one of those metals might be beryllium. This metal could make safer nuclear reactors. It can also be used to build atomic bombs, so maybe the government should control all production and sales of this fascinating metal so it never gets into the wrong hands. There is the possibility of growing giant laser crystals in outer space for fusion reactors. These could also be used as weapons. Since the government is still the only entity that can afford big space projects and we'd want to control the sales of these laser crystals so evil doers couldn't get them, this to could be a government business. Perhaps even helium 3 mining on the Moon someday will be a government business. We'll still be paying for the government's profits in the price of things but we might get more for it. Who knows? Many industrialists don't want the government to compete with them so they like things as they are.
To grow a bigger economy we need nuclear power and nuclear waste repositories. Nuclear power is as cheap as coal and doesn't pollute the air or contribute to global warming. The electric power companies are willing to invest in nuclear power, but regulatory overburdens, the forbiddance of waste recycling and waste disposal site construction is stalled by the federal government and anti-nuclear radicals who want to spend more on wolves and grizzly bears. Let's hope they get eaten alive during a nature hike! Just joking. We really don't spend that much on wolves and grizzly bears. Endangered wildlife should be protected, but I'd feel safer if wild predators were kept in fenced reserves or shot with trank darts and moved into remote unpopulated regions so that children and livestock don't get attacked. Rangeland, both private and federal, and desert irrigation with dams and aqueducts to provide water out west and in the east are needed. We need to establish energy farms of hemp, corn for ethanol and soy for biodiesel as well as grow food to trade with poor countries in exchange for their labor and natural resources. We Americans are overeating and most of us are fat these days. I would hope that the food companies and restaurants raise prices before the government taxes food the way it does cigarettes! And I hope the food business people make enough profits off us pigs to afford exporting more food for sale at the lower prices poor nations can only afford to pay. The way people eat those Big-Macs and Subway sandwhiches I have no doubt the minimum wage for adults could be raised and even with price increases people would keep eating that tasty stuff.
We must develop GMOs like zero THC hemp and do stem cell research. With stem cells we might even heal the brains of people with Parkinson's disease. We must tap winds, other alternate energy sources and develop recycling technologies. We must allow clear cutting for valuable wood and replanting (replanting is essential) in the national forests because mature trees don't absorb CO2 the way young fast growing forests do. We must allow drilling in ANWR and explore the continetal shelves of the Arctic Ocean for oil with submersible robots. We must develop AI and robotics. AI and robotics may be the real keys to fantastic economic growth. One man operating a machine may become as productive as ten or a hundred men. Therefore, if we employ just as many people we get ten to a hundred times as much wealth. Or more people leave the factories and go into human services like teaching, child care, medicine and elderly care, counseling, sales ( some products need a qualified sales person to demonstrate and explain, not to push on you), construction (I don't forsee androids that can build skyscrapers and homes), information technology and the arts (lots of frustrated artists out there. If only people had more money to spend thanks to cheap products produced by automation they'd buy more art!), massage therapy, and whatever else you can think of including gourmet cooking.
People must be allowed to have the moral freedom they deserve and the wasteful drug war must be ended. Enough money is wasted on the drug war alone to provide health care, including treatment for addicts, for uninsured Americans. Small amounts of highly taxed marijuana could be sold in licensed private clubs and we could use the "British System" on hard drug addicts. Two thirds of Federal prisoners are in on drug charges. This is absurd. It costs $25,000 to $35,000 a year to keep a prisoner in jail. We could pay for his or her treatment and follow up (making sure he or she goes to NA meetings or other meetings) with one year's prison expense. Meanwhile, alcohol is our number one drug problem and many drunks are also addicted to prescription pain pills and tranquilizers. Remember Rush Limbaugh?
We also must consider reducing taxes on investments and taxing luxuries. If people take their tax cuts and invest them there will be GDP growth. If they just spend they will pay. The ones who invest will make enough money to afford luxuries made more expensive by taxes, so it won't trifle anybody. However, if everybody goes out and invests in businesses that flop like so many dot.coms did in the nineties...So the balance between C and I spending and G (GC+GI) spending must be maintained and that's the job of our elected officials who set the budget, the Fed. reserve board and the captains of industry. Times are always changing so interest rates, taxes, government borrowing and spending, etc. are always changing.
Most of this progress for economic growth can be achieved with private money if legal permission is granted. While the left worries about wild man-eating predators and the right worries about clumps of cells that are no more human than some ear wax, people suffer. Then there are others who don't want to pay any taxes at all but want the roads, dams, bridges, water-ways, police protection, etc. for free despite their decent paychecks. We call them thieves unworthy of citizenship, and the IRS gets 'em. So render unto Ceasar that which belongs to Ceasar and render unto God that which belongs to God...
http://en.wikipedia.org/wiki/Supply_shock
http://en.wikipedia.org/wiki/Keynesian_economics
http://en.wikipedia.org/wiki/Economics
