Well here’s a little goofy thought trick that I’ve come up with:
Imagine a situation where the economy is in a recession. The government decides to increase aggregate suppy (potential GDP) and aggregate demand (actual GDP) by increasing investment. The government could do this by essentially doing the whole “public-private partnership” thing and putting money up front that investors and entrepreneurs could then take and make investment decisions with. These entrepreneurs could start building things like hospitals, energy plants, and other priorities. In return, the government would get an equity share in these projects, which it could begin to sell off slowly after a few quarters. This would increase the demand for labor and natural resources in the short run, while increasing the overall “economic pie” in the long run. Such a plan would also be deficit-neutral (or close to it) in the long run, since the government would presumably earn some money from their equity share in the new investment projects.
Of course their would be problems when it comes to the nature of government and there would be a lot of rent-seeking going on, but a well-crafted program could avoid much of that and succeed in its goals.
The main problem I see with this is that it would divert at least some entrepreneurs from making their own investment decisions. In other words, entrepreneurs would forego making their own investments and instead make the government-subsidized investments. Thus, aggregate demand wouldn’t increase at all, it would simply shift from some investmetns to another. Such a scheme would obviously create some distortions. I don’t think that such distortions would be a large problem though, since I think that, overall, the de facto government-subsidization of investments would increase investments to at least a certain degree.
Just a lot of thoughts thrown together rather haphazardly. I’m interested to see what other peoples’ takes are on this.
Haha, good point. What I’m talking about specifically is living standards and GDP. Could such government spending, on net, increase living standards by:
Increasing demand for labor, thereby reducing unemployment and increasing wages?
Increasing capital accumulation, thereby increasing the goods produced in the future?
In South Africa the government privatized the national telecommunications provider, but still kept the largest minority stake in the company. Therefore there is no incentive for the government to deregulate the industry and allow competition by issuing licenses to potential competitors. With the private monopoly in place not only does the government reap the dividend benefits of an extremely profitable company but also takes taxes from those very private profits as well.
It’s no surprise then that telephone and internet services are ludicrously expensive and poorly serviced. South Africans end up in the situation where decades of their taxes funded the expansion and creation of infrastructure for the telephone company and now they have the privilege of having to pay line rental fees to “borrow” what they have already paid for and was once public property.
In contrast, the SA government largely kept its hands out of the cellphone business, believing that cellphones (at the time) were far too bourgeois for the average South African. Today there are multiple cellphone companies all competing for market share, driving down prices for consumers and improving service.
There are more active cellphones in South Africa than there are people. Even the poorest of the poor in South Africa can afford a basic pay-as-you-go cellphone, meanwhile only the richest of the rich can afford basic broadband internet.
Real GDP is not determined by aggregate demand, and the GDP measure itself is severely flawed.
So basically Keynesian economics. Well, if the government does this by creating money and funneling it into the banking system, you will get ABC’s, if they give it directly to consumers, you’ll have an abrupt recession. If the government decides to tax and/or borrow from the loanable funds market (assuming they pay the debt with tax revenue and not seigniorage), then (1) capital will be over-taxed, private ventures will become less profitable, and labor demand will fall–overall inefficiency; or (2) they take loans from the market and engage in ventures which would have been taken care of by the more efficient private sector (central planning versus disseminated information and price mechanism), or engage in unprofitable ventures the private sector is uninterested in (waste), draining the economy of vital scarce resources.
No.
Aggregate demand is not a problem, the price mechanism works, if you allow it to.
Where did the government get the money since it has none of its own? It would have to tax, borrow or print.
You correctly surmise that “entrepreneurs would forego making their own investments…” I believe the distortions would be a large problem. The scheme appears to be the classic distortion of the structure of production described in Austrian macro theory (see the Garrison presentation). Basically, it sounds like the fomula for boondoogle projects on a large scale. In the end, more capital will have been squandered into the wrong projects, in the wrong size, at the wrong time. Thus, we would simply have more malinvestment, and therefore more econcomic pain, ie, the very things that government stepped in to “cure” would instead become more intense. The opposite of the intended result! I think this is the essence of the Austrian analysis.
As far as selling off equity shares, who would have the capital to buy such shares? If the capital existed, the government would not have felt a need to intervene. The economy would now be in worse shape compared to when they started the intervention, and the government would continue to own the industries. Pure disaster. Am I on the right track here?
I’m not nearly as well read as most folks here but I would say principle your thoughts are still a bad idea. If your arguing for a lesser of two evils, than yea you may be able to argue that it’s somewhat less taxing and more productive on the economy.
Still, It seems to me your still trying to stear the economy and not let the economy(individuals) stear it to where they want it. Also does your system necessarily prevent malinvestment? Or does it just make a bubble in a different way?