Here we go, Cats, a return to the long overdue examination and discussion of matters economic.
This will be the first of a semi-regular series of posts on key economic concepts that politicians, bureaucrats, academics and the braindead lamestream meeja (with some notable exceptions) are either unaware of, or incapable of comprehending.
As someone who considers most current expenditure of taxpayers’ money by Australian governments to be an unnecessary evil, I’ve looked on in horror at the astounding increase in this expenditure as a proportion of economic activity in this country – the sum total of the latter being what is laughably referred to as Gross Domestic Product (GDP).
Keynesianism is a hastily cobbled together agglomeration of utterly discredited hypotheses. If Keynesian remedies worked, there would be no need to keep repeating them, nor would the inevitable outcomes end up being exactly the same – i.e. the opposite of what was intended (again).
Some of you would of course, be familiar with the following “equation”:
Y = C + I + G
Y is Aggregate Demand (AD or Y at “equilibrium” or GDP)
C is household Consumption
I is Investment
G is (cue spooky muzak …) Government spending
There is also a slightly different version of that equation including the net effect of exports and imports, with “+ (X – M)” tacked on at the end.
My primary quibble with the equation, if you accept its validity in the first place (and I don’t), is that government expenditure(s) might increase aggregate demand.
Some among us may argue that “government” must administer certain “public services”, including the obvious, such as national defence and law and order, i.e. policing and the administration of justice – increasingly and dangerously absent as it is in many jurisdictions across the West.
A significant proportion of expenditure by governments is entirely unnecessary and a deadweight on productive economic activity, resulting in a misallocation of resources and inexcusable wastage of taxpayers’ money. Not to mention the accumulation of public debt that will never be repaid in any foreseeable timeframe, although the regular interest bills will be (ad infinitum).
Which brings us to the concept of this Post, the “crowding out” of private expenditure by intrinsically inefficient and invariably ridiculous public expenditure.
Increased government expenditure is funded by increased taxes or borrowing (e.g. issuing treasury bonds). Increased taxation reduces the capacity of individuals to spend, save or invest their money. Governments then spend taxpayers’ appropriated monies on “public goods and services”, most of which are unnecessary, more efficiently provided within a free market, or a shameless attempt to buy off segments of the electorate, e.g. welfare recipients.
Chasing government allocated money can also be quite lucrative, given that bureaucrats invariably have no idea how to properly price anything. Two obvious examples are the “building the education revolution” and the NDIS, the latter of which sees goods or service providers charging top dollar as soon as they know it will be billed back to government.
As for “crowding out”, it’s a simple concept – every dollar that governments spend, “crowds out” a dollar that might have been spent by individuals on goods or services the latter might need or want.
Hence one of the golden rules of economics: “Individuals will always spend their own money more efficiently than governments”.
There are many sectors of the economy where the “crowding out” effect is an obvious negative for taxpayers, the economy and society. Here, we’ll briefly examine two, public infrastructure and social welfare.
Public Infrastructure
One thing you can’t accuse Australian governments of (apart from exhibiting any semblance of competence in their role), is possessing a lack of enthusiasm for ridiculous, unnecessary and obscenely expensive infrastructure projects – the trifecta of political and bureaucratic stupidity, obstinacy and incompetence.
These public infrastructure projects will inevitably crowd out private infrastructure projects.
Recent obvious examples would be the light rail in Sydney and Melbourne’s suburban rail loop, neither of which would have seen the light of day if an objective cost benefit analysis had been conducted beforehand.
However, the standout example of this vainglorious spendthrift insanity is the headlong rush to destroy our previously perfectly functional electricity grid and replace it with heavily subsidised and spectacularly useless “renewable energy sources”, such as wind and solar.
The cost for Australian taxpayers of this course of action is unquantifiable and unfathomable – exactly as it is intended to be.
Social Welfare
When did any of you willingly donate any of your money to a charity?
I’ve never done so in my life and there are no reasons whatsoever to do so nowadays. Governments “fund” charities. The latter have become beholden to that major benefactor, entirely unsurprisingly.
I refuse to donate to charities for that very reason. A portion of my exorbitant tax bill directly funds them. This unwarranted income now allows a significant number of them to be run along the lines of major corporates.
The management gift themselves special privileges hoping these never come to the attention of the public (who pay their wages). Until they do – see the case of AFFORD, exposed during the Disability Royal Commission.
Therefore, government has “crowded out” my charity change.
Hope you’ve enjoyed this post, Cats. The next topic is “Opportunity Cost”.
Yay!
Bruno Frey economics. There are some more interesting results from crowding out, including:
* Don’t pay for blood donations, it reduces the supply.
* An example from a daycare in Israel where fining parents who did not pick up their kids on time resulted in an increase in parents doing this.
I first stumbled across the concept of “crowding out” in the mid 80s. We were trying to build a house, but there were no bricks or tiles to be had for neither love nor money. The kilns were going flat chat 3 shifts a day, 7 days a week. Added 6 months to a 3 month build
Why?
The biggest reason was the government.
The Darling Harbour redevelopment need millions of pavers. As did all the ‘Bicentenial Malls/Plazas’ or revamps of malls/plazas that seemingly every council was installing. Because of OPM it was much more profitable for the brick pits to make pavers and sell to govt funded projects than to ordinary people
So I paid twice, rent so that we had somewhere to live for 9 months (instead of expected 3), and through taxes for the &#$$### projects.
At very least the budget deficit should be deducted from G, since it is stealing from future taxpayers.
Indeed going the whole hog and using Y = C + I – G might be a better measurement of true national wealth.
One reason why the population ponzi scheme must continue, ad infinitum.
Well the crowding out is about to go into warp drive if the government co-opts the building industry into delivering only 20% of this boondoggle https://www.skynews.com.au/australia-news/albanese-government-plan-to-build-12-million-new-homes-by-mid2029-branded-a-sham-by-business-columnist-terry-mccrann/news-story/6a492d6b5ec916e1bc7488ab203435bb
An outstanding Post, IMO.
So thanks for this.
Just to further hammer home this point, the additional problem with the government spending your money on you is that the efficiency costs of raising $1 in tax is that the tax discourages $1.40 in activity. So just the break even, the government needs to provide $1.40 of benefit for each $1 it raises in tax. And we all know heaps of government spending is just pissed up against the wall.
Social Welfare
There’s more than 10,000 charities now in Australia with approximately 1,000,000 employees. (Paid by government largesse with taxpayers money)
That’s a lot more public servants than we usually count, all dependent on tax payers.
It has always struck me that of the components of the GDP calculation ‘C’ and ‘I’ are driven by increasing value, while ‘G’ spending mostly is not.
A business spends money on some piece of equipment because they will make more money than it costs them to buy it. The company they buy it from has done it with the same motivation. These transactions can be easily described in dollars.
Point is that the company that buys the equipment will be able to spirit up additional value. That is the motivation for the economic act.
With consumption a customer buys something which is worth more to them than the money they surrender in exchange. Suppose I buy a couple of macarons for $5. I do that because they are worth more than $5 to me. If they were worth $5 of satisfaction to me then I would be indifferent to buying them. If they were worth less I simply would not buy them. Same applies to cars, holidays, houses…you name it. When we use expressions like ‘bargain’ and ‘rip off’ we are comparing price to value. So while it is not ‘seen’ in dollar terms consumption is a matter of increasing value.
If you just look at money then when I buy my macarons, you see $5 worth of product exchanged for $5 cash. It does not explain anything. It is just a dissection of a lifeless act. It gives no insight as to its motive force.
It is the fact that the shopkeeper sells for $5 what cost them $4, and I get value that I might have been willing to pay $6 for, which is why the economy works. It is millions of people, all day every day, exchanging what has one value to them for something worth more than it.
Then you have the clumsy fat pudgy fingers and dim squinty little eyes of government who think that they can tinker with this to make it comply with their dead, simplistic, incomplete and erroneous comprehension of an economy.
And every time they cock up, they blame the economy and think the solution is more government.
Yeah…but just think of the boost to GDP.
[sarc]
I no longer donate to general charities in Australia, only one very unfashionable one, and to one international one.
Vinnies etc can go jump in a lake.
And thanks for the article in general.
Reminded me that the ABC has done a very good job of crowding out in the children’s TV arena.
At least now the Bananas aren’t around to get threatened with the chop.
And as Diogenes said, I recall Sydney Olympics making it extremely difficult to find bricklayers in Melbourne, the price per thousand laid immediately doubled.
Seems like they set the cost of extra child-care time too low. If the marginal cost was twice the min hourly wage it would filter out many/most of the latecomers.
Regarding the formulas above – people these days don’t bother even learning the basics of economics since they can just go straight to MMT and Govt prints money for the good(s) to be distributed to all needy folks … Virtue and Money aligned perfectly!
This is the real challenge, even top-level Pollies don’t know how money works or why we shouldn’t just let loose the printers to solve everything.
Thanks for the learnings.
Catallaxy doing economics again! Who’da thunk it!!
Looking forward to Opportunity Cost now, Rabz.
I think I understand it but I am sure there are ramifications you could assist with.
Excellent concept to work with.
Reminds me of the Gillard redefinition of ‘Investment’ as ‘Welfare spending’.
and
This is also at the heart of the problem. The government and it’s enormous bureaucracy doesn’t know how to value add. Nor do they know or understand the mechanisms on how to achieve that. This is evident, as they don’t show restraint in expenditure, even by doing something simple like shopping around for the best possible price.
This feeds into the key point of the post, that it crowds out the private sector that’s not reliant on government contracts by depriving or even destroying markets. This is illistrated best by the disastrous pink batts scheme. The feeding frenzy for moonlighters suplying cheap substandard imported insulation was insane. This resulted many well established insulation instillation businesses going broke, resulting in at least 3 suicides by directors of failed businesses in Victoria alone. And the two main suppliers of batts (CSR and Fletcher) closing down 3 of the 5 manufacturing facilities in Australia.
The government should pursue the only meaningful ‘net zero’ policy any government should purse – net zero deficit.
The complete lack of any discipline in deciding what OPM should be spent & the ‘kicking the can down the road’ by governments of both stripes is what is going to break us as a nation.
My proposal is:
All ‘capital’ items to have a specific funding allocation reserved in future ‘operating’ budgets, so that funding the related debt repayment is baked into those future operating budgets. It is a constraint on future spending to fund past spending.
Current year tax receipts first fund any principal allocation of prior year capital items as above, the funds left over are available for current year spend (including interest on debt).
Any resulting deficit this year to be funded from reduced spending next year – not simply ignored and stuck on the tab for the kids and grandkids to pay.
That way the trade off of massive capital & operating spend now has an immediate and ongoing consequence for future budgets. Of course, I don’t know how to get the politicians and bureaucrats to actually stick to this…
All those foolish (Keynesian) economists who said it was ‘a great time to be in debt’ during lockdowns when interest rates were unsustainably low somehow forgot the debt has to be repaid. Governments also spent very poorly as outlined elsewhere.
To meet insatiable human wants now they pulled forward the standard of living from our kids and grandkids for us to enjoy now. This is what happened from 2008 – 2021.
The ‘kicking the can down the road’ started to end in 2022 when the future finally started to catch up with us. We are reaping what we sowed, unfortunately.
Thanks all, some excellent contributions and salutary (and sobering) examples.
Slightly off-topic, but I regard most gubbermint advertising/raising awareness* campaigns as a type of money laundering. They are payments to the (traditional) media to keep a fossilised industry on life support, with the expectation that the intubated will go easy on the gubbermint, lest the latter ‘pull the plug.’ How many of these taxpayer investments (‘playing sport is helfy, so do it’) are evaluated for effectiveness/outcome?
*Awareness must be the heaviest element known to mankind, for it seems that regardless of how much is done to ‘raise it,’ the only option is to attempt to raise it again. Have we not noticed how solidly anchored it is, or are we raising it using satellites now? Elon, do you have a spare rocket?
Excellent example, Buccaneer. Good luck if you’re building or renovating once construction commences on all this magical new social housing. Especially given the recent numerous bankruptcies of housing construction companies due to massive inflation driven increases in construction costs, exacerbated by locked in contracts and supply shortages of key materials.
The same government that restricts land supplies and piles on various charges to houses also takes 40% + of my take home pay.
Then takes a bit of that 40% to subsidize a selected group to make it “ fair”, and borrows the rest.
It also imports 100,000+ new consumption units to kick the debt can down the road some more.
Today they dropped the fiction of unis being visa mills.
It’s a big club, and you are not in it
What a silly, unconscionably stupid piece.
Just kidding, it’s great and well worth continuing as there’s not enough economics here. The silly aspect of the equation of course is Government. It shouldn’t be there as it’s simply a claim on production.
We have friends whose wife runs a lucrative online business selling pre- and post-hospital wear for patients. It’s in the US. Her most profitable client is someone in Australia who supplies these outfits to NDIS’ers. No volume discounts are required, as the guy doesn’t give a rats. It was a funny conversation with her at dinner a while ago as she was telling us about this customer thinking it was so unusual. She then mumbled something about how he told her he was connected with some “DIS” government program.
Getting back to the equation I think if you just treat it as a representation while at the same time being cognizant that G is nonsense, it’s okay.
My standard line now when asked for a donation is that I gave at the tax office. We pay so much tax but do not get an aged pension if we have saved our money. We also pay more and more for health care, education and utilities despite our high taxes. Meanwhile the government wastes our money on inefficient, unnecessary and corrupt endeavours.
Yes, thanks Rabz.
Speaking of government spending. The lezzo posing as our foreign minister has just given Vietnam $94 million for, you guessed it, “fighting climate change”.
You don’t have strive hard like Musk to become rich in Vietnam. Just wait for foreigners cash to roll in for “climate change” and bank it.
Then there is that very useful allied concept, opportunity cost: what are we not doing because we are spending our time, effort and money on this?
The government has no money.
Let’s not forget Governments arse about logic.
They ‘allow us’ to retain a portion of our income. The assumption being it’s all theirs.
And per chance their penalty rate of tax is not high enough, they budget the difference as ‘tax savings’ . We should be grateful to our master say Dobby.
We also need to consider the burden of government on the economy protecting existing big business with barriers to entry. Regulations on green tape, safety, sustainability, social justice, health, worker entitlements, ….and the layers of it local, state, federal.
A serious cancer within our economy.
Late to the party, but good post and timely.
Here in Queensland we have a government given to building infrastructure to prop up its electoral chances. The $94 billion Big Build; providing the grateful State with renewable energy grids, battery factories, hydrogen hubs, pumped hydro and the 2032 Olympics.
This is not simply a diversion of capital into inefficiently spent and largely unaccountable projects – which it obviously is.
It is sucking physical resources that cannot be replaced away from productive investment (per Diogenes and Buccaneer) and introducing a hidden killer, time delays, into the value creation chain in the private sector.
It is also giving life to unplanned and largely unknowable future brakes on the economy by bringing to life infrastructure (particularly including ruinous renewables) that would not be naturally created – but which will be forced into use by government diktat in a reverse of if ‘it is there they will come’.
JMK didn’t seem to foresee this.
To a non-eknockomist like me, this has been very useful. Moar pliss.
Great stuff, Rabz.
Possibly the worst example of ‘crowding’ we face is the public subsidies to ruinables (in the billions) which, combined with regulation, are sending privately owned coal and gas fired plants broke – not to mention destablising the grid.
While the diehard Keynesians deny that crowding even exists, our pollimuppets are tacitly admitting that it does by using these sledgehammer tactics to achieve their aims.
Imagine how wealthy we would be if these wastrel nincompoops just got the hell out of the way.
“Individuals will always spend their own money more efficiently than governments”.
The four ways to spend money:
1. Spend your own money on yourself – you buy yourself a new car.
2. Spend you own money on someone else – you buy a birthday gift.
3. Spend somebody else’s money on yourself – the company lunch/dinner.
4. Spend somebody else’s money on somebody else – all government spending!
With 1, you are very careful to spend the least amount you can, but the quality of the purchase is also very important – you spend the least you can to get the highest quality you can.
With 2, you are very careful about how much you spend, but the quality of the product is not a significant issue – you spend the least possible, daylight is your second consideration and quality a distant third.
With 3, how much you spend is not highly significant, but the quality of the product is very important – price is meaningless, but the quality is all important.
With 4, neither how much you spend, nor the quality of the product matters much – you don’t much care how much you spend, nor what quality you get.
With all government spending being spending other people’s money on other people, it is clear that neither price nor quality matter – and this is obvious in any government spending.
I’ve read that before, kneel. Where does it come from?
Johanna, I believe I saw a youtube clip of Milton Friedman says exactly that.
Just had a quick look but couldn’t see it.
https://www.youtube.com/watch?v=nBWXuptwJpg
I think this is it.
Yep, sounds like Uncle Milt – always a beacon of common sense.
Despite being in the stratosphere of his field, he could always make things understandable to ordinary people – no need to baffle the plebs with jargon.
A great man.
“Milton Friedman says exactly that”
Indeed.
As Johanna notes, he also regularly demolished leftists tropes about other things as well, including increasing tax rates to “invest” in the economy. This sort of thing is only ever appropriate where there is insufficient private capital and/or experience to do it AND there is a public interest in giving all and sundry access the product/service – eg, Telstra when it was first created. The Commonwealth Bank, the various state electricity commissions/boards and so on also had compelling arguments for their creation and even their continuation, as we have seen with the sale of such entities to private interests.
In my view, where such entities are initially given monopoly power in order to create a fair and equitable outcome for all Australians, or to “force” standardisation, then after some time the market should be opened up to private players, but I see no compelling reason for the government owned entity to be sold or closed.
While it’s certainly true that such government owned and run entities are highly inefficient, keeping one inefficient player that is not motivated solely by profit in any area of “essential” services can play a fine role in “keeping the bastards honest”, and there are obvious efficiencies that can provide significant profit to private competitors that government owned/run entities can almost never access. As long as such government owned entities are “independent” (ie, use their own profit to expand availability and/or reliability, and are not giving their profits to government, nor being given a budget from government to run), then they can play a role that I think needs to exist – for “essential services” like electricity, gas, water and banking at least.
I would be more than happy for mutual societies to play this role, however previous experience leads me to believe these will eventually be infiltrated by private, competing interests and then “carved up” and “sold off” to no-ones benefit but the rich and powerful and the board members – a la NSW’s NRMA insurance arm.
The ‘how’ of the way government companies are sold is very important, but the fact that this has been mismanaged at times is separate from the principle.
Telstra once had 100% of the market. Every year, that percentage falls, and anyone who remembers waiting at least a month (in capital cities) for a phone connection does not mourn the PMG.
These parents were quite wealthy and were quite happy to pay for the convenience.
Beforehand, not picking up your kids on time was seen as “the wrong thing to do”, and those parents were certainly not going to allow themselves to be seen as “doing the wrong thing”.
The daycare later removed the fine, but it was too late: the number of parents not picking up on time stayed high. Any notion that picking up your kids late was bad behaviour had disappeared, and could not be reinstated.
It’s hard not to think that big government types think that if they own your house, they own your vote. The big question remains, will the libs belt this rubbish or fall in behind tyranny?
“The big question remains, will the libs belt this rubbish or fall in behind tyranny?”
The history on things like climate change, COVID lockdowns and so on is not encouraging.
Hopefully, they will see that many people have had enough, and will oppose thiings like a CBDC.
In 2013, The USA house of Representatives rejected the Appropriations Bill, and shut down the Public Service for a couple of weeks.
Obama then added the National Parks to the List, so someone would notice.
My economics education happened in the late 70’s. I heard of Galbraith and Keynes but couldn’t figure out whether they didn’t know what they were talking about or i didn’t know what they were talking about.
Only thing I learned was that if I saved it was good for me but bad for the economy, and vice versa.
So, Y = C + I + G should have looked something like Y = (C-Gx) + (I-Gx) + G, where G reflects the redistribution of productive C & I money into “Spending other peoples money”
Boxcar – why overcomplicate matters – as Bruce has pointed out above and which I’d posted on this blog (in an open thread) previously:
Y = C + I – G + (X – M).
Let me say, thanks again to Rabz for writing this post.
But really, Y = C + I – G + (X – M) explains nothing and it actually leads most economists to totally misunderstand what is happening in the economy. And according, what might be the appropriate government responses to a downturn.
But this post isn’t the place for such a discussion.
Rant over.
There is only one.
Just getting the hell out of the way.
As part of that whole, cutting taxes and expenditure on any fripperies while shutting the eff up and making itself invisible.
Or it is reduced “down to a size where we can drown it in the bathtub”.
Thanks, Groves. What a legendary liberty quote.
Thanks rabz. Well worth putting up.
It’s algebra. It’s not supposed to explain anything. It’s just a constraint on how the language may be used. The negative sign in front of the G says that net wealth is decreased by government spending, and since every dollar the government spends is obtained by extortion from the people via tax, this is eminently defensible.
Truly the relationship is thus:
Y = f(K, L, A, t, l, …. ) [production function]
Y = C + I + G + NX is just a way of fitting the above to the circular flow concept and the data we have.
Really we ought to measure GDR and compare it to GDP. It would be very insightful.
Anything that would lower the expected outcome of the production function will then of course lower GDP. This would show up in GDR but not necessarily in assumptions that may be made from looking at the C + I + G + NX relationship; with the BOP/IS-LM model you see how Keynesian policies never really can work unless you are America and have no dependence on external trade [despite their floating currency, their very large internal market means trade and public sector policies work differently].
Empirically stimulus interventions don’t work; Barro found estimates of k on average to be around 0.8. Keynesian theory assumes it is above 1 as in the short term savings are sacrificed to increase GDP through consumption.
The crowding out is a form of Ricardian equivalence. Do you want $1 taken from you now or $1.10 in a year’s time if interest rates are 10% p.a.? It doesn’t really make a difference and so the Keynesian policy merely increases the cost of credit for the private sector. 100 bn AUD of new spending to prop up GDP will simply reduce the loanable funds supplied by an equivalent amount. At best, the Keynesian multiplier, k, will usually never exceed 1.
The government has no money, public sector spending can only be financed by taxation, inflation or borrowing (also “dissaving” but this rarely happens and it deprecates the accumulation of prior revenue).
Magnifique, Pol.
This is what we want to see, incomprehensible hypothetical gibberish, as she is spoke.
Love the referencing of the IS/LM, takes me back to the Macquarie theatre last century.
#Dinobores4evah
Yet it acts as though it does.
But it’s wrong – behind the mirror, eff off …
2dogs> putting a market price on stuff makes it hard to go back to prior arrangements like “… doing the right thing”.
It’s not hypothetical at all. Emil Classen has a good primer on international portfolio finance that proves the BOP equals the relative oversupply of money to GDP compared to other countries. It’s just simple calculus. It’s not beyond high school-level mathematics and is empirically verifiable.
No no no, the IS/LM BOP model, which makes short work of Keynesian nonsense like spending your way out of high prices. There’s a reason why Keating was wrong about J curves.
Barro destroyed the basis of Keynesian intervention. Stimulus on average, even most of the time, does not work and on average reduces GDP by $20 for every $100 spent by the Government. I don’t see what’s hard to understand about a real-world calculation of k. It’s not like the laughable 1st-year macroeconomics bumf that asserts that 3 ? k ? 5.
So we really should defund the police?
Err, no. In both direct and indirect costs the policy of not funding a public shared security force named ‘police’ is a much worse outcome. Free markets do not solve every problem in the best way e.g. security, local services, health.
The example above where fines for tardy parents were introduced caused a previous non-market solution(“shame”) to stop working as it should. Market failure.
Evidence please friend. Property rights emerged from the Californian gold fields as a convention so “health” as a public service is a big stretch.
You are assuming because there is no monetary value there is no market. That isn’t evidence of market failure at all. The shaming value and loss of face have a consequential loss in reputation and trade opportunities.