Government spending is not a zero-sum game

Libertarians Conservatives often argue that the economy government spending is a zero-sum game, and that government spending it necessarily decreases everyone's standard of living.

I strongly disagree; the economy is most definitely NOT a zero sum game. The big variable is productivity. This number drops quite a bit when lots of people are out of work and a lot of capital plant sits idle. If the government can do something (i.e., spend money, change regulations) to significantly increase productivity, then we might come out ahead.

I'm not saying that the stimulus package will necessarily increase economic productivity enough to cover its cost. Some of its elements might and others might not. You can't just scream "Socialism!"; you have to argue each one on its merits.

Government expenditures can work both ways on productivity. One very large federal expenditure is specifically intended to reduce the productivity of any country we choose (if not our own) as much as possible. That's the military budget. The completely pointless wars that destroyed most of the infrastructure and productive populations of Vietnam and now Afghanistan and Iraq are excellent examples. These wars also did their part in lowering our own productivity, albeit unintentionally.

Even in peacetime, our military budget -- larger than the rest of the world's combined -- is a huge drag on our productivity. (Will we really need to fight every other country in the world at the same time? Maybe we will when oil really gets scarce.) Defenders of the military like to say "if you want peace, prepare for war". But experience has shown that our military regularly burns a hole in the President's pocket. Bush's disastrous Iraq war is the best but by no means the only example. We've also seen that our enemies are careful to attack us in ways that render our most expensive military toys completely useless. What good were our aircraft carrier battle groups in stopping the 9/11 attacks? They cost Osama bin Laden about $500,000 and 19 volunteer casualties, easily the most successfully leveraged military investment in history.

Just diverting money away from weapons and warfare will be a big improvement even if that money largely goes to waste.

I used to be fairly libertarian. I've changed my mind. We now have direct experimental evidence for what happens when our government takes a completely laissez-faire role in the economy. It's irrational to maintain a view contrary to real-world experience.

The system becomes unstable, and it eventually crashes.

I draw an analogy between the current economic crash and a wide area electrical blackout. Blackouts occur when some random but not unexpected event triggers a cascading failure that takes down the whole grid. That's why grids employ dispatchers. They have computers constantly running "what-if" scenarios: what if this plant trips offline or that power line shorts? If the computer model shows that a cascading failure could result, the dispatchers shift power flows or bring additional generators online to guard against it. They can't protect against every possible failure scenario, but they do a pretty good job of avoiding the most likely ones. That's why we still have blackouts, but they've become pretty rare.

We need proper market regulation for the same reason. Starting with the Reagan administration, we steadily dismantled nearly every regulation adopted during the Great Depression to prevent a recurrence. This reached a fever pitch during the Bush/Cheney years. All sorts of reserve requirements were lifted. Virtually every merger and acquisition was approved. Enforcement of securities laws was spotty and antitrust enforcement was completely non-existent. New financial instruments like credit default swaps proliferated with almost no regulation.

Corporate executives routinely exploited the moral hazard of bankruptcy by establishing highly leveraged positions where, if they guess right, they'd personally profit quite handsomely. But if they guess wrong, they simply have the corporation declare bankruptcy and leave its creditors holding the bag. (And some of these people have the nerve to complain about homeowners who default on their mortgages.) Our financial system got into a highly vulnerable state, and eventually all it took to trigger a cascading failure was a routine blip in the market.

Had we kept reasonable market regulations in place, none of this would have happened. Market regulation doesn't impair free enterprise; market regulation enables free enterprise to function by ensuring that its assumptions are actually valid, such as open information flows and meaningful competition. Right now I am much more concerned about what will happen after the stimulus, because that's (hopefully) just a one-shot affair. I really want to know how we'll keep this from happening again. We can't tolerate companies that are "too big to fail". If a company is too big to fail, it's too big to exist and we should use the antitrust laws to break it up.

The government must mandate that much more information be made available about consolidated financial instruments to judge their soundness as investments and the financial health of the institutions that issue them. (Power grid dispatchers can't do their jobs without current, detailed knowledge of what's going on in the network.) And it's possible that some investments, like credit default swaps, may have to be heavily restricted or banned altogether if it can't be shown that the market can remain stable with them.

The bottom line is simple: the financial libertarians have had their chance, and they blew it. It's time to try something else.