Image giving an economics undergraduate the following question: “Unemployment is high. Inflation is low. Borrowing costs are cheap. What should the government do?” and they responded “cut the short-term deficit immediately to show strength!” You’d have to give them a bad grade, right? But that’s what our government, Democrats and Republicans, are doing.
But there’s a theory that by cutting $39 billion from the government over the weekend and by Obama’s signaling that he is transitioning to tackling the long-term debt he will unleash the confidence of the private market. The Republican JEC did a study that proved this and everything; a study that had nothing to do with selectively picking countries that were already going strong and increasing exports and using aggressive monetary policy to grow the country to tackle the debt. By proving we are serious about the debt and doing painful short-term cuts confidence will come into the market and people will start hiring and growing the economy.
If so, the 10-year Treasury should be going gangbuster on the idea. How did it do today? Grabbing the CBOE Interest Rate 10-Year T-No (^TNX) (I want to see intra-day movement, so no FRED):
Huh. It didn’t really do anything. I wonder, what does this value look like on a longer timeframe?
Oh right, we already have record-low borrowing costs.
Rortybomb 
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A for-profit business can estimate the revenue it will receive from a capital project in the future and decide if the return is sufficient to justify the cost of debt and other capital.
Much of what the government spends money on does not generate revenue at all. Defense spending, transfers to low income citizens who do not pay much in the way of taxes, etc. In many cases the amount spent dwarfs the tax revenue it will generate. Or, as in the case of say high speed rail, money spent today simply sets the stage for operating losses in the future.
The analogy is way off, at least as a description of current government practice. If government were to decline spending unless government revenues could be shown to exceed the spending ,then it would be a more apt analogy. But progressives will never allow that. Because budgets are about values, but not monetary kinds of value.
If government were to decline spending unless government revenues could be shown to exceed the spending ,then it would be a more apt analogy. But progressives will never allow that.
Nor should they. The value of government spending is not determined by the revenue it produces for the government, but by the value it provides to the people. Everyone who drives on a road derives value from it, but most roads are not toll roads; they are paid for through a separate channel of taxation. To conclude that therefore roadbuilding is inefficient and wasteful would be foolish. The operating losses of a transit system are the gains of every citizen who rides below cost. Etc.
A business operates for its own benefit (or its stockholders’ benefit), but a democratic government operates for its citizens’ benefit (in the absence of corruption/breach of fiduciary duty in both cases). So a government’s actions can’t be interpreted solely in terms of benefit reaped *by the government*.
Incidentally, one of the few forms of spending that does pass your test is tax enforcement. Each dollar spent on enforcing the tax laws (at the current margin) yields *more* than a dollar of additional revenue just from the particular cheats caught (not even counting the potential effect of deterring other cheats). Care to guess which party successfully pushed to cut it?
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“Fifty six percent of finance chiefs in the United States say they are more optimistic about the economy that they were last quarter, up from 50% in December. They plan to increase capital spendng by 12% on average over the next 12 months, a robust rise that marks the highest level of capital spending growth since 2004”
CFO magazine April 2011, page 21.
Survey conducted by John Graham, professor of finance at Duke’s Fiuqua School of Business.
Please don’t call lthem fairies.
Uh, we cut a relatively insignificant amount from the budget and you’re actually trying to say that the economic outlook is up because of that? Seriously?
There is more to what defines a favorable market than the government. You know, like the market.
I think the really important question is, when the confidence fairies arrive, will they be riding ponies?
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