The Long-Run versus the Short

by Mario Rizzo

In this past Monday’s New York Times (July 11th) there appeared an article entitled, “Economy Faces a Jolt as Benefit Checks Run Out.”  The following excerpt gives the gist of the article:

An extraordinary amount of personal income is coming directly from the government.

Close to $2 of every $10 that went into Americans’ wallets last year were payments like jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody’s Analytics. In states hit hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody’s Analytics estimates $37 billion will be drained from the nation’s pocketbooks this year.

In terms of economic impact, that is slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on a recovery that is still quite fragile. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve’s program to pump money into the economy and the payroll tax cut, scheduled to expire at the end of the year.

“If we don’t get more job growth and gains in wages and salaries, then consumers just aren’t going to have the firepower to spend, and the economy is going to weaken,” said Mark Zandi, chief economist of Moody’s Analytics, a macroeconomic consulting firm.

My problem with the article is simple. The emphasis is on the short-run effect of a possible (partial) cut in the spending that gives rise to this income. But, for me, the bigger story is that so much of income is from unproductive sources, that is, transfers.  We have become a society in which more and more, and especially during a recession, the link between production and income has been broken.

So now when some people say taxes are too low we realize that they have missed a big point. Production is too low; transfers are too high. In the long run we are exhausting the wealth with which we have financed the welfare state. The disorderly collapse of the American welfare state is proceeding apace.

3 thoughts on “The Long-Run versus the Short

  1. Right. You don’t spend your way to prosperity. You produce your way to prosperity. Production requires both the liberal and the proper allocation of capital and labor. When Keystone Cop politicians and bureaucrats meddle in the economy, they distort the market signals which make that possible. Why don’t professional economists like Zandi understand that?

  2. I’ve always thought that Milton Friedman’s greatest theoretical contribution was the permanent income hypothesis. Only permanent changes have permanent effects. It is the theory that slew the Keynesian dragon.

    Temporary tax cuts, spending or monetary stmulus can have only transitory effects. The recipients of the temporary benefits, knowing they are temporary, will spend only the interest on the windfall. The rest will be saved.

    Knowing empirically what is temporary or permanent is not alwys easy. But hwen a policy is announced as temporary, it can have no permanent effects.

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