The new economics

Over at The G.

Apparently \”crowding out\” is just so passe.

Old fashioned nonsense. This dismissal comes from Aditya Chakrabortty…aqnd he\’s the peep who writes the Guardian\’s economic editorials. Which might explain how some of the Guardian\’s economic editorials end up quite so far off planet.

Because crowding out is rooted in the obvious and fundamental idea of opportunity costs. If something is being used for one purpose then we cannot go off and use that same thing to do something else.

If the government is employing labour to produce green energy then we cannot use that same labour to tend to the elderly. It\’s exactly the same argument as \”jobs are a cost, not a benefit\”.

So of course crowding out happens.

The much more interesting and important question is the one that comes after this admission: is it important? How large is the effect, is what we\’re losing by having government do this over here worth more than what we get by government doing that over here?

For as ever, the cost of getting something is what we give up to get it. And this requires a case by case examination of what we are getting and what we\’re giving up to get it. And this applies not just to employment of assets, the deployment of tax revenues, the deadweight costs of their collection but also to regulation.

For example, the jams, jellies, marmalades and sweet chestnut purees regulations (as amended 2004) protect us from the horrors of jams (and jellies!) made with essential oils of citrus. An important protection some might argue: the same regulations also make the sale of pineapple marmalade (no, me neither, but apprently it\’s a condiment in Southern US cooking) illegal.

Is that cost worth that benefit?

In short, of course crowding out happens: the question is whether it\’s worth it or not.

6 thoughts on “The new economics”

  1. To deny crowding out is to deny the idea the idea of scarcity, which is one of the basic ideas of economics. Obviously not basic enough for the denizens of Farringdon Road.

  2. Deepends on what you mean by “crowding out” though. La Wik gives the standard def:

    “If increased borrowing leads to higher interest rates by creating a greater demand for money and loanable funds and hence a higher “price” (ceteris paribus), the private sector, which is sensitive to interest rates will likely reduce investment due to a lower rate of return. This is the investment that is crowded out.”

    Notice that this is more specific than your very general story about the government and the private sector competing for the same resources, which could be anything. For example, say that there is only one nuclear power station in the country, and that they are not easy to build (supply constraint); there are companies who want to use it to generate power, but the government owns it already or takes it over. Boom–crowding out.

    You can use the same sort of logic to “prove” the Laffer Curve: take any communist hell hole; allow some modernisation and liberalisation; bank extra tax revenue. Boom, boom–you’ve just moved along the Laffer Curve. See, it was there all along!

    So, yes, imagine that we are at full employment. If the government starts buying up labour, it will bid up its price and crowd out private employers. I agree. But of course this is a non-sequitur. We are not at full employment and no one is suugesting that the government is crowding out private firms trying to hire labour. They are arguing about the standard version whereby the government is competing with the private sector for a fixed stock of savings. As the government uses more, it crowds the private sector out.

    The problem with that story IMO is that when government deficit spends by definition it leaves aggregate income the same and increases aggregate savings. Nothing gets crowded out because there is nothing to crowd out.

    There’s another argument that individuals see the government deficit spending and reduce their own consumptioni today to offset future tax increases, so that there is no actual net stimulus provided to the economy when the govt deficit spends.

    But no one has ever explained to me why this only holds for one sector in the economy.

  3. vimothy, I’d pay more attention to your arguments if you knew what a non sequitur was. It’s not a straw man, you know.

    My mother used to make pineapple marmalade when we lived in British Guiana. It was one of the most delicious things I have ever tasted. I wish I wasn’t diabetic now.

  4. “It does not follow”.

    You simply can’t do truth tables in this little comments box, so that’s out. Of course, we also use it metaphorically as well as literally–like many phrases. But I can’t help you to understand the world or mathematical logic. You’re just going to have to struggle through as best you can. Or not.

    Thanks for the cake, though. More tea, vicar?

  5. This is a strange post. It seems to imply that when a private business is formed it immediately crowds out another business. After all the labour force is unchanged.

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