Bloomberg reports that Donald Trump’s budget director loves him some deficit spending:
White House Budget Director Mick Mulvaney is signaling similar flexibility, saying on CNN Sunday that decisions about deductions remain up in the air as “the bill is not finished yet.” He took it a step further, by adding that a tax plan that doesn’t add to the deficit won’t spur growth.
“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth,” Mulvaney said. “If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”
Our national debt recently hit $20 trillion. Of course the Trump administration doesn’t care about that. Remember, Trump hilariously promised a pack of gullible rubes that he would eliminate the debt (not the deficit, but the debt!!) without touching entitlements — which is laughably impossible. Now his budget director is praising deficits as necessary for economic growth.
But in addition to showing that Trump doesn’t care about the debt, Mulvaney’s comment reveals a flawed Keynesian economic mindset that pervades the intelligentsia.
It’s the same flawed mentality that leads Keynesian economists to argue that World War II, a time of privation and severe rationing, was actually a time of great prosperity — because there was a lot of economic activity involved in making weapons of war. (I debunked that claim here.)
It’s the mentality that leads people to argue, as the Los Angeles Times did recently, that an earthquake is an opportunity for economic growth — because there is a lot of economic activity involved in rebuilding.
The magnitude 7.1 earthquake that shook central Mexico will certainly damage, but not debilitate, the Mexican economy and might even give it a boost next year as reconstruction efforts get in full swing.
It’s the mentality that leads a Paul Krugman to argue that false reports of an alien invasion headed towards Earth could be great for the economy:
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better [off].
(This claim is not just wrong, it is also insane.)
But — just as strange women lying in ponds distributing swords is no basis for a system of government — world war, destructive earthquakes, and phony space invasions are no basis for a system of economic growth. The reason is that we should not measure economic activity simply in terms of economic activity, but in terms of output — in other words, are we actually better off as a result of the activity? A fella named Frederic Bastiat explained all this with something called the “broken window fallacy.” Here’s how I explained this fallacy last November:
Imagine some kid throws a baseball through the window of a bakery and breaks it. The baker now has to repair the window. One could look at this as a great boon for employment in the community. After all: someone has to be paid to make a new window. Someone has to be paid to install it. When each of these workers is paid, they now go to other businesses and spend that money, and now other businesses do better through the magic of the Keynesian multiplier! If you’re a Keynesian, you could almost work yourself into believing that it was a good thing that the window was broken!
And yet, intuitively, you know this has to be wrong. Destruction is not good for the economy. What’s the flaw in the analysis? It has to do with the seen and the unseen.
The payments to the window maker and the window installer are what is seen. It doesn’t require imagination to see that people are being paid.
What is unseen is what the baker could have done with the money he had to use to fix the window. Maybe he was saving up for a new oven that he now can’t buy. With the new oven, he could have made his products more efficiently. The bread he sold would have been cheaper. That may mean more sales and profits for him (after all, he wouldn’t buy the oven if he didn’t think it would pay off eventually) and he can now spend the extra money elsewhere. What’s more, cheaper bread means the consumers buying the bread have more money in their pockets. Their standard of living goes up and they can spend money elsewhere. Or, as a commenter of mine points out: “perhaps the baker might have used the broken window money to pay a young apprentice who would then learn a valuable skill and perhaps one day own a bakery herself.”
But all of that is unseen. It requires imagination to realize that the money used to repair the window could have been used for other, more productive things.
The people who advocate for deficit spending are measuring prosperity simply in terms of GDP. They are asking: is there a lot of economic activity? They are not asking if we are actually better off.
This fallacious mindset is exacerbated by the fact that economists insist on including government activity in GDP — even though government activity does not necessarily improve people’s welfare the way private activity does. As economist Jeff Herbener explains: “The only way we can tell whether something in a net addition to human welfare is through voluntary purchase.” In a 2014 post on this topic, I quoted Herbener to this effect and said:
At this point, you’re either nodding your head in agreement, or an objection is popping up in your mind: “Wait, how do we know that only voluntary purchases satisfy preferences? Don’t government actions satisfy people’s preferences? Isn’t that why people vote?”
The short answer is: sure, government actions satisfy some people’s preferences, by taking money from one group and giving it to another. (Government’s economic action ultimately boils down to that.) When you take from Peter and give to Paul, Paul’s preferences are satisfied, to be sure! — but Peter’s may not be. We can’t know for sure, because Peter was not given a choice. His choice was: pay your taxes, or have men with guns take you to jail. That’s not much of a choice at all, for most people.
In the free market, however, voluntary exchange satisfies the preferences on both sides of the transaction. When a car is sold, it’s because both the dealer and the purchaser think they are better off once the sale is finalized. Otherwise, the sale would not happen.
This is the type of activity that we want to maximize: transactions in which all parties benefit. But when we include government spending in GDP, we are including transactions that don’t necessarily benefit both sides — meaning that they don’t necessarily make consumers better off.
But in the mind of Mick Mulvaney, if we can borrow money and pump up that government number, we can add to the GDP number. Sure, government economic activity redirects resources away from productive private enterprise, but who cares about that? All that matters is that magic GDP number. What we care about is activity, not output. And borrowing money can lead to a lot of activity. That’s why we’re so much better off when we have war and earthquakes — because there’s activity!
Austrian economist Ludwig von Mises once said: “War prosperity is like the prosperity that an earthquake or a plague brings.” In a quote I just made up, Nobel-prize winning Keynesian economist Paul Krugman responds by saying: “That sounds like some pretty awesome prosperity to me!”
And Trump budget director Mick Mulvaney says: “Right on, Krugman!”
This is a ridiculous mindset. But it is very common in Washington D.C. — apparently even among the new people who have come in to turn everything upside down, etc. etc.
Meet the new boss. As inefficient and economically ignorant as the old boss.