My grasp of economics is pretty thin, so help me out here.
So, basically, let’s say the government throws money “into a garbage bin” by building an Alaska-Kamchatka bridge, or whatever. Is the money really wasted? It didn’t disappear, it just went into the pockets of the construction workers, the contractor, etc. Those people in turn will spend it and it will go back into the economy.
Or, let’s say there are kickbacks (is that the right word?). So, a road doesn’t need to be repaved but it is because the paving contractor knows the mayor. Was the money wasted? It’s now in the hands of the contractor and his workers, who will spend it and put it back into the economy.
Wait, I think I see what resource is actually being wasted. It’s not money, it’s the labor of the workers. Able-bodied construction workers are working on trivia instead of something that actually helps people. So, it seems that you can never waste money per se.
My question is a bit disorganized due to my confusion on the matter.
Try to be as factual as possible, although I know it’s a bit tough here.
You can enrich people by spending money on pointless projects for them to build, but those projects won’t help the economy much in the long term; in other words, it’s a poor return-on-investment (if your returns are measured in societal progress rather than pure dollars, in which case infrastructure projects are never a good return on investment.)
A road is an economic multiplier: it makes it cheaper for people to get from one place to another, cheaper and faster to move things from one place to another, and so on. All of this makes commerce and trade more efficient, which makes the economy better. But a road to nowhere will not be used, and will not have these positive effects after construction ends.
This is called the “broken-window fallacy,” after an article by Bastiat. Whether “money” is being wasted is, as you say, not really the important question. The useful labor of these workers is being wasted by producing goods which are not needed instead of goods which are needed. Obviously this means fewer useful goods, and hence less wealth in the economy than there would otherwise have been. Therefore supply is lower than it could be, and prices are higher.
Suppose you literally burn your money. You do your job and your boss pays you and then you destroy the money he paid you instead of spending or saving or investing it. It’s hard to say how that isn’t a complete waste. You didn’t get anything from the money obviously. The people who you could have theoretically given it to didn’t get it. Your boss took money out of the comapny’s profits and used it to pay you; his money is gone.
There’s a common confusion between money and value, and always has been, and maybe always will be. You mostly can’t waste money, but you can waste value.
That’s the basic point of opponents of the simulus bill. We think that it’s a bunch of political payoffs and bad spending which will waste the potential value we could have gotten for it. Ah, but it doesn’t matter much anymore.
True. But there is some correlation. Money is generally a means of symbolizing value for exchange purposes.
In the example I gave, the value was the work you did and the profits the company earned. The money was just a convenient means of translating one to the other. But by destroying the money, the value of both was lost: you’re not going to get your work back and your company won’t get its profits back. The company at least came out even: they received the value of the work you did for them.
My understanding (and I’m not any kind of economist) is that while those pieces of paper are gone, everybody else’s pieces of paper are now worth fractionally more. By taking a dollar out of circulation you have increased the scarcity of dollars, and hence the value. The total value of all the dollars in circulation remains the same. So you haven’t actually destroyed (or wasted) any money.
I am open to correction on any or all of the above.
There’s probably some scarcity value to dollars as a commodity but I think it’s pretty minor. The amount of dollars in circulation is essentially whatever amount people want to have. The government prints them up in response to public demand. So if you burned up some dollars and made them scarcer, this would create a void in the public’s desire for cash and the government would print up some more. (Although in reality both effects would be too infinitesimal to be noticed.)
Even if you just want to look at the money itself, rather than the things of actual value like labor, there’s still money wasted here. Sure, the construction workers who built your bridge to Kamchatka got paid, and they paid the folks at the stores they shop at, and so on, but for that same money, you could have gotten all of that plus a bridge that’s actually someplace useful. So you got less return from your money than you could have, so you wasted at least some of it.
That’s a pretty extreme standard. If I buy food, did I waste my money because I could have bought stocks instead? Even if you concede the need to stay alive, the “ideal” plan would be to buy a 200lb sack of rice every couple of months and live off that while you invest all the rest of your money. The end result? Hetty Green: a woman who never wasted a dime and was worth a couple of hundred million dollars when she died.
If the federal government set aside a few billion dollars and just donated it to the residents of a single state, would you have a problem with that? Spending money on a pointless work project amounts to the same thing.
The way that an economy builds wealth is through increasing value by trade. If instead of trade to increase value, you just throw the money around, you do move money through the economy but you don’t increase wealth.
That’s why war is such a drain on the economy. In an economic sense it is waste because the use of resources does not create wealth, it literally destroys resources. (Dropping a bomb is exactly like burning money.) There are probably people who would claim that you are buying national security, but there are certainly examples I could think of :rolleyes: where that is arguable.
I think what we’re talking about here is opportunity cost. If the government builds that Alaska/Kamchatka bridge (just to use the example from the OP) there is obviously some economic benefit, if perhaps only in the short term. However, the real question is how could that money have been used otherwise, and could it result in a greater benefit? Would it be better used improving domestic infrastructure, or paying down the national debt to reduce future interest payments, or given directly to taxpayers to use as they see fit, or whatever?
If the money is being used in a way which does not yield a substantial benefit, or if there is an alternate use which would yield a larger benefit, then yes, I think it’s reasonable to call it wasted. In the same way, if I go buy a 52" TV instead of, say, paying off my credit card debt, then I think a reasonable person would say that money was wasted.
Not necessarily. If that’s what you wanted, and a 52" TV increased your personal utility, then money was not wasted. Value was created.
Here, my friends, is one of the most simple-but-yet-abstract concepts in the world that so many people don’t seem to get. Wealth, or “value” equals
Wealth = Benefits received - Price Paid
Where ‘Benefits received’ is defined by the utility of the purchaser. Meaning, you and me as taxpayers. Not a 3rd party.
This simple little concept (or the straying from it) is the kernel behind nearly all wasteful spending that separates buyer from seller from payor. Government spending is a classic example, where the buyer is the US Gvt, the seller is the construction company building the Bridge to Nowhere, and the payor is you and me, the taxpayer. Insurance coverage such as HMOs are another.
There is a nice little exchange between yorick73 and DigitalStimulus on this SDNB thread that discusses the topic nicely…
The gap between Wealth_creation<no taxation> and Wealth_creation<taxation> is the wealth that is destroyed by the government due to the opportunity cost phenomenon, as you mentioned above.
So yes, if the Gubmint takes $1 billion from you and me to build a Bridge to Nowhere, some construction workers will get jobs, local restaurants will see their business rise a bit, and somebody will sell some steel to somebody. But what would have happened if that $1 billion had stayed in the pockets of taxpayers? They would have spent, saved or invested it defined by their own personal utility. The difference between the former and the latter is the wealth destroyed by the use of government dollars to fund the project.
Doesn’t matter. I’m addressing the suggestion in an earlier post that you could waste money by burning it. I’m saying that if you burn it, all the remaining dollars will increase in value. You’re saying that the government can issue some more dollars to make up. Either way, no value has been destroyed.
Your second point, that the effect would be infinitesimal, surely depends on how many dollars I burn. What if I burn 50% of all the dollars?
So, are you saying that all government spending is, by definition, wasteful? That cannot be right. The Alaska/Kamchatka bridge benefits someone. Even if one person drives across it on the one day per year that it is open, that one person benefits. Now, is that worth one billion dollars to society? Probably not. However, if that bridge is built to get between two cities with populations of one million people each, then the expensive bridge might be better utilized. Everyone coughed up their part of the price and the whole area benefited with faster, safer transportation of goods and people.
Also, suppose that one billion dollars had stayed in the pockets of taxpayers. If there are 150 million taxpayers, then each contributes just under $7 each to make one billion dollars. Those 150 million people are spread across the entire country. Does my spending my $7 at a local business improve the economy of far western Alaska?
But this is exactly why people are saying that the last stimulus did not work. They say that people saved it or paid down credit card debt with it instead of going out and buying consumer products.
But you say that any reasonable person would consider buying a big TV a “waste”.
The new dollars would only replace the old dollars as physical objects. They would not recreate the value of the work you performed so that would still be lost.
I said infinitesimal for that reason. Infinitesimal means very small not non-existent. If you take a very small quantity and multiply it by 416,300,000,000 (50% of the American M0) it becomes a significant sum. But even if Warren Buffet, Carlos Helu, and Bill Gates jointly registered hibernicus as a username, you guys still don’t have enough money to actually try this experiment.