Tuesday, October 27, 2009

The Economics of Wasteful Spending

For those who think that quick spending by the government including the construction of mega projects is the way to go for stimulating the economy, then wasteful spending is really not a bad thing.

It does not matter how one spends the money so long as one spends it. They may even quote the great mighty Lord Keynes to lend support to their thinking - "You can employ men to dig holes on the road...."

There is a certain truth in this kind of thinking. The whole idea is to put cash into people's pockets so that they can spend in order to keep factories running so that people can continue to be employed by these factories.

At the macroeconomic level, it does not really matter how the money is spent - because we are thinking in the aggregate - not that the microeconomic workings are not important but that they are not being considered yet.

At the extreme, we could have money being printed and passed in boxes from the mint to the central bank who then delivered the cash to the government to be distributed - by some criteria - to the people.

The people receiving the cash would in principle spend on the things they need - like rice and salt - and then are happy. This is the political side. This is how elections in the free world are won.

But the economic consideration is slightly tricky. You want to see how that cash is used, specifically whether that cash can be used to stimulate production of products that people want. If the additional cash does not trigger additional effort on the part of the people, then the whole economy is in deep trouble. You have money without effort. This may sound like utopia for individuals, but it spells disaster for the whole nation - because it is not sustainable. More money can be printed - for forever - but the nation is likely to be incapable of doing anything else.

So when we are talking about "stimulating" the economy, we are talking about how to excite people into effort or more effort because they have become motivated to become active in the economic mainstream. There are incentives that they can see, incentives that excite them to excellence, that there is reward at the end of the day - either in terms of cash, awards or mere recognition from peers or community.

The money part is an important and crucial part, but it is only one small little part. The money is required because of the structure of the modern economic system, where there is such a great dicotomy between production and consumption - of the right stuff - that without money, we as individuals are dead in society.

The money part is the wheel that moves. The real part is the exercise of men and women in their daily existence - of the things they do to make themselves feel alive, every day, every moment.

The judge of the correctness of our government spending is whether it is exciting the right thing in the people. This is how we know whether we are heading the right direction, and whether we are going to have an economic future.


walla said...

The criteria is the rub. If two ringgit can be spent on two equivalent things, spending them on only one will be a waste of one unit which could have bridged an additional production process to generate perhaps four new economic activity points.

On this argument, the prevailing focus on leakages from government spending is timely. More billions are going to be pumped in and yet an obscene amount will be siphoned out again and again through overpayment at prices not reflective of more authoritative and competitive forces.

Furthermore, if money flows to only a few who would have special reasons not to show they have a lot of money they can't later explain away to watchdogs and other agencies, then the criteria of blanket spending to stimulate the economy may actually end up with cash accumulation not in bank but in hand. Of only a select.

On top of that, being able to get away with something that is wrong will encourage it to be repeated endlessly because what has worked before will be expected to work again in accordance with repetition being a way to reduce risks.

Which therefore means that overlooking sub standard or overpriced procurements will become by implicit lack of enforcement the staple norm instead of the excizable exception.

Which will in turn promote more white elephant projects.

Which may initially excite the right thing in the hoi-polloi, for example the first six months of launching KLIA and Formula One, but after that, reality will set in, unfortunately long after capital flight has taken place, even as that capital would later be surely missed for what it could have done to ...upkeep, update, sustain and maintain the continuation of those projects. So that they can continue to excite the people to do the right things.

And since wrong done at start will meet conflict at end, there is at least one other factor to consider. Namely skills specialization. A grinder at teens learns technical drawing and becomes a master tool maker later. As engineering progresses by more research, the simple skills grow year by year to become premium-commanding skills later. Because machine tooling is a global business, mobility is awarded to flow to wherever higher pay is earnable under competitive market conditions.

walla said...

But what of the road tiller in the rurals? There will come a day when it becomes uneconomic or even flatulent of scarce capital resources to build more roads than users in remote places. What becomes of that road tiller's skills then? Which new activity born from government channeling of stimulus funds will excite him to upgrade his skills? Even if he moves to subcontracting in tandem with population growth he will be restricted to small jobs and low mobility. Because for every one of him there are thousands of others like him out there not just in his district but also in his state, country, world.

Certain occupations will only be at the cusp of sunsets by dint of their intrinsic nature. At best they will end with the worker lifting his family above the poverty line. That is if the market conditions are steady and disinflationary against the rate of his wealth accumulation.

The question thus ends in whether the government in trying to stimulate the economy is only stimulating those parts of the occupation spectrum which are at the cusps of sunset.

And it is increasingly more apparent that the recurrence of their prime-pumpings is because the human resource development aspect of this country has been ossified too long when matched against what others elsewhere in more enlightened and less vicarious modes are doing. Have done.

It is now just fire-fighting. A bush fire here, douse it out. A bush fire there, douse that out. Helter-skelter.

There will be many crises to come. This is just the orientation period before the programme of hard realities, cold facts and dull regimentation start.

And the people are not ready. For reasons long identified and debated.

The best governments in the world do their utmost to minimize themselves while ensuring the most stable and secure environment in which individuals and ideas can be agile-activated in keeping with the universal concepts of increasing mobility and fluid compositions. Minimizing oneself also means minimizing costs incurred that are attributable to oneself, or caused by same.

Wise and far-sighted criteria making and proper and appropriate excitations go hand in hand to create better states.

Where are we today?