How Assumptions Get Buried in Economic-Theory Derivatives


Through the randomness of Twitter, I came across a post by Jacob Mortenson, who is currently working on a PhD in Economics at Georgetown.  Apparently, he had previously posted a chart showing the large gap between federal government spending and federal revenue (aka, the federal deficit), finding it to be historically large.  Somebody else suggested that he should redo the chart adjusting the numbers for inflation and population growth, and in this post, he does so.

He ends with a “mea culpa,” saying “we have returned to deficits that are roughly on trend.”

Not being an economics PhD — or even a candidate for one, in the foreseeable future — it seems to me that he gave in far too easily.  At some point, a field of inquiry gets to the point that it is speaking entirely in intellectual derivatives, without questioning whether they should apply.  (It’s sort of like failing to question the true value of derivatives from mortgage-backed securities.)

Yes, the population has grown and prices have risen since the 1980s, but why does that mean the economy can tolerate a proportional amount of government over-spending?  Why does government get to put that thumb on the scale?

Some time ago, I suggested that inflation is a willingness to pay more for the same things.  Why should people’s willingness to pay more for quotidian items mean the government should be able to continue spending proportionally more than it takes in?

And if the population is growing, shouldn’t the government be spending proportionally less while taking in proportionally more in revenue?  The activities of the military, for example, don’t increase just because they’re defending more people back home, and a larger population should generate more wealth; if it isn’t, maybe that’s a problem that’s relevant to the discussion of deficits.

None of this is to say that tolerance for deficits should have nothing to do with the cost of goods and the number of people, but simply adjusting for those considerations and declaring, “OK, we’re good,” shirks a whole lot of intellectual responsibility.  Worse: The shirking serves to benefit big-government, progressive arguments, as if government’s role in society is as a proportional economic actor.

  • ShannonEntropy

    Some time ago, I suggested that inflation is a willingness to pay more for the same things.

    Inflation is simply the debasement of a fiat currency, caused in recent history by both deficit spending and Fed maneuvers like “quantitative easement”

    It doesn’t even have to be a fiat currency … in ’49er Gold Rush towns prices skyrocketed as real gold dollars flooded local economies … but the principle is the same =► more money chasing the same goods

    We can’t inflate our way to wealth, any more than an individual citizen can borrow their way to wealth. But both are ways of “kicking the can down the road” … and letting our kids & grand·kids deal with the mess we will leave behind for them