Rationality and government spending
While watching the Colbert Report last night I was struck by a comment by Governor Mike Huckabee. He said, and I unfortunately paraphrase, that when you are in debt, you spend less. His phrasing seemed to imply that this was common sense, and indeed, it is. But I worry that it is the same common sense which, in other circumstances, seems to fail so blissfully.
Take, for instance, stock trading. Acting ‘rationally’ and acting with ‘common sense’ seem to be two entirely different beasts. The rational investor will buy low and sell high. The ‘common sense’ investor will be the person who buys a stock when it is doing well, and sells it when it is doing poorly. In other words, it sounds perfectly sensible, aka follows ‘common sense,’ but in fact is the worst possible investing strategy.
I wonder if what seems like common sense, in this case, is not in fact sensible. Governor Huckabee’s point, that we should spend less when the economy is doing poorly seems to have a corollary: we should spend more when the economy is doing well. This certainly seems false: if the economy is doing well, citizens can buy services privately, and should have less need of public services, such as medicare/aid, food stamps, and heating subsidies.
If the corollary is false, the optimal situation seems clear: during times of plenty we should reduce government spending, and then use excess government capacity to spend during the rough times. This seems politically untenable, though, not least because policy makers rarely plan over time periods that long, but future economic troughs are almost never, ever predicted accurately. One can imagine the day to day political turmoil that must emerge during times of plenty, when tax revenues are high, as various interests jockey for a piece of the pie. The discipline required to do the difficult thing, and create and maintain savings and funds and capacity to deal with downturns seems quite beyond that of most of our political class.
So, in sum, without going into the direct theoretical merits of Keynes, he does seem to be right, from a rational standpoint. We should invest more public money when the economy is soft, and less when things are growing. Simple rational principles, but, unfortunately, not ‘commonly sensible.’







