Guns or Butter (Vol. 121)

Understanding this Economic Metaphor

Guns or Butter was originally a phrase used to focus on the need to choose between more investment in the military strength of a country or more production of consumable goods. This phrase arose during the period of WWI but today symbolizes a much more important point.

‘Tradeoff’ is simply an economic concept of choice. We cannot have everything we want so we must choose. Do we want Guns or Butter? Do we want to invest or consume? When we spend money on one thing, we cannot spend it on another thing. It is a basic Econ 101 concept.

The economic choice I am focusing on is whether as a country we choose to spend on investment in production, or redistribution/government spending. By that I mean that the Federal government policy choices force this choice to a significant degree. The Federal government needs money to operate. The larger the Federal government is, the more money it takes from its citizens to run it. The more it takes from the private sector, the less there is to invest in productive capacity for goods and services. That means less growth in the economy.

Starting with the government social programs implemented in the 30’s, and escalating rapidly in the 60’s, the size of our government has grown dramatically compared to the early years of this country when its economy was growing rapidly. During the first 150 years of our country, government spending accounted for less than 10% of our GDP. Today it takes over 35% of our GDP. Much of that growth in government comes from ‘entitlements’, welfare programs, unemployment programs, Medicare and Medicaid, and an unwieldy unelected bureaucracy that decides how these and other programs will work or be administered.

This is the tradeoff I am referring to: bigger government means less investment in growth of the economy. Higher growth means a higher standard of living for everyone. More social and redistribution programs, means less investment in production and slower growth. The money that the government takes to redistribute is coming from a pie that is not growing as fast as it could, or should, be.

We are a wealthy country and it is appropriate to have social programs to help the needy. Unfortunately, the welfare state that has grown in the US goes far beyond just helping the most needy. The trillions of dollars we spent on the War on Poverty, have accomplished little in reducing poverty; the perverse incentives it has created has led to many of our citizens becoming dependent on the government and incentivizes the wrong behavior. The Social Security, Medicare and Medicaid programs are all broken and costing the government over 1 trillion dollars every year.

Judge programs by their results not their intention as Milton Friedman has often stated. The social welfare programs adopted in this country may be well intentioned, but they are not working as intended. And the cost of the Federal government is out of control. We run enormous deficits and our interest bearing debt is around 33 trillion dollars, and growing rapidly. It does not matter if we take money from the private sector by borrowing or taxes, the result to the economy is the same, we are taking capital from the private sector which cannot be invested to grow the economy for the benefit of all of us. And if we continue on the present path of government spending and deficits, it will eventually destroy this country. That is not my observation, that is what our Treasury department means when it says in the Executive Summary to our audited financial statements, ‘The current fiscal path is unsustainable.’

BOTTOM LINE

Programs to help the needy and those in retirement are appropriate in today’s society. But, they are not working financially or as intended. This can and must be done at much lower cost to the government while still meeting the needs of our neediest citizens. We need some Common Sense in government programs, and we will all be better for it.

As a nation, we have made the tradeoff to a bigger government than in our historical past. We are now in a situation where we must make another trade off, to make the government smaller, while still working for the good of the entire country, and choosing to leave more capital in the private sector to increase production of goods and services and improve our standard of living. Here is my Formula for Growth:

SMALLER GOVERNMENT + LOWER TAXES + BALANCE BUDGET = MORE INVESTMENT + FASTER GROWTH

LEARN ECONOMICS, THEN VOTE SMART