Dear Friends, $2 trillion

$2 trillion

They’re going to cut that out of the Federal budget – the (unlikely) bros and their DOGE. $2 trillion. And every one of those dollars – how many is that? Oh, right, 2 trillion of them – is a dollar saved for us, you and me, the People. Think of that!

will have $2 trillion more than we thought we had at our disposal! What are you going to do with your cut? $2 trillion! Wow!

$2 trillion

Man! that’s a whole lotta lettuce! So how am I going to get my share? Where will it go, that $2 trillion? Well, obviously, into a bank account somewhere, wait, yes, I know, it’ll go to the Federal Reserve, but not to be spent for the Government, but for us!

Well, no, actually. This is money not spent. It doesn’t go anywhere because it doesn’t exist. This is money that the Government will not spend. $2 trillion is a whole lotta lettuce, and when it's not spent there’s $2 trillion less lettuce. Cuts in government spending do not give money to people, they take it away.

The bizarre idea that money appropriated by Congress, in Washington, is money taken away from the people goes along with the equally bizarre, but contradictory idea that it is spent in DC and not in truly deserving places throughout the nation. My newsfeed gave me a piece with a truly heart-wrenching title, stupidly I didn’t bookmark it, but it was more or less: “Every dollar spent in Washington is a dollar denied to a dream somewhere in America”. This could be the basis for a great Country song (I’m torn between recommending fiddle or pedal steel guitar as featured instrument). It’s just not how dollars and their spending work.

Yes, the highly regressive tax system in the US favors, enormously, the most wealthy, and without rectifying that the US will not come even within shouting distance of democracy. We’ve gotta work on that … but right now, whoever paid it, a dollar collected by taxation is a dollar spent. Why is it spent? Where is it spent? On what is it spent? Was spending it this way a good idea? Who the hell knows, it’s spent. An extra dollar spent is a dollar increase in demand.

The thing to keep in mind is that a dollar spent anywhere by anyone for anything is, strictly quantitatively, the same as any other dollar spent anywhere else. Yes, there are better or worse things on which to spend a dollar but, at what economists call the macroeconomic level every dollar spent is just another dollar spent.

And yes, as night follows day, a dollar not spent is just another dollar not spent – that is, it is a decrease in demand. I was going to make a joke of saying there was an English guy, long ago, can’t remember his name … did it begin with a K? But let’s take all that as read. Keynes. The theory of aggregate effective demand. So what happens if you cut $2 trillion from aggregate demand? Well, aggregate demand falls by $2 trillion, and, as we’ve already agreed that’s a whole lotta lettuce. But that fall triggers successive rounds of similar decreases, so that a multiplier effect occurs making the overall decrease greater than that of the original $2 trillion. (Very simply, I am paid less, therefore I spend less, and so on.)

Keynes says that it would be best, obviously, to spend on valuable things, hospitals are one of his examples. But such spending is often politically impossible – Tories don’t like hospitals, especially if people can get treatment in them for free. It would still be beneficial – less beneficial, but still beneficial – to bury large sums of money deep in the ground so that anyone who digs for them can claim what they find, and go and spend it. This nicely captures the overall “macroeconomic” effect of spending, independent of who spends and for what.

Or: “Efficient” non-spending is still non-spending. “Inefficient” spending is still spending. Remember the fabled $600 hammers bought by the Pentagon (who knew that they needed so many hammers)? Those 600 dead presidents per hammer went to the hammer manufacturers, and they passed on at least a few of them to the workers. For the “macroeconomy” a dollar spent is not a dollar lost, though just what it is is harder to say. “Pork barrel” spending is not government waste to the districts in which it is spent; and the whole truth is revealed by the normal Republican procedure: vote against spending legislation and then take credit for the increased spending it allocates to your district.

Government spending is spent buying things (goods and services) from businesses, and, overwhelmingly, American businesses. When you decrease government spending you immediately decrease the revenue of American businesses. Will that decrease be made up, or more than made up by a corresponding increase in private spending? The empirical data says probably not, and Keynes and post-Keynesian economists have pretty strong theoretical explanations of the data. So maybe we shouldn’t make the $600 hammer a great American hero, but whenever anyone spends $600 the benefit goes far beyond the one to whom the $600 was paid.

One other thing, maybe one and a half. The Republicans have been very successful, and for a very long time, persuading people that all the problems of the government debt and deficit come from “tax and spend Democrats”. This is false. First, Republicans will spend like there’s no tomorrow when it suits them – the so-called “Reagan boom” was the result of unparallelled “military Keynesianism”. Second, large increases in debt and deficit occur for the most part when the Republicans are in control from massive tax breaks for corporations and the most wealthy: and, come January 20th, it’s going to be déjà vu all over again. So, about taxes – the extra half:

What happens when taxes are reduced? Well, it depends: on whom are they reduced? Reducing taxes on consumers will increase consumer demand, and increase it the more the lower the income bracket. Reducing taxes on corporations and on the super-wealthy will … well, who the hell knows? It depends on an unholy mix of conditions. But in recent decades, at least, it has not led to significant increases in investment spending – the supposed justification for the reduction. Instead, the most popular use for all that lovely unspent money is on stock buy-backs. Reducing taxes on corporations will increase corporate earnings. The aim of tax reductions is to increase spending.

So: government tax (and interest rate) policy has only a very unreliable effect on corporate spending or spending by the very wealthy. The effects of policy, tax or otherwise, on ordinary consumption spending are among the most reliable, and for very simple reasons. Unemployment insurance has been possibly the most effective measure in mitigating the severity of economic downturns since 1945 – especially in partnership with Social Security. Whatever else is true, reducing taxes on the wealthy and on corporations decreases tax revenue, and so will increase debt and deficit, with no evidence that such reductions are unchaining the sleeping giant of entrepreneurship.

Ich lieg’ und besitz’: laßt mich schlafen!

(“I have and I hold: let me sleep”) as Fafner, drowsing over his gold, says to Alberich and the Wanderer.

Love and solidarity,

Bobby