Thursday, January 27, 2011

Arguments Relevant to Cutting Spending

When it comes to balancing the federal budget, one of the possibilities that commonly come up is abolishing the NEA.

This is a nice, easy call for a certain politicians – particularly a Republican politician – to make. The National Endowment for the Arts is made up of them elitist liberal types and, clearly, represents a form of funding that the government can do without. Let’s not think that the Republicans are picking this example out of a pure interest in the welfare of our nation. They are picking an example that statistically means giving less money to people likely to vote for their opponents in the next election.

It is also the case that the NEA represents a minute portion of the federal budget and, as such, challenging it does not threaten a huge block of voters – and almost no voters who might otherwise vote Republican. We would have to abolish 1,000 organizations like the NEA to balance the budget.

However, because this is a topic that often makes it into the press and is a part of our national conversation, I think it might be useful to look at this subject as a way of assessing some of the types of arguments that are used.

These are argument types we will likely see a lot of as we move to balance the budget.

(1) The argument from Practical Political Use

Many people who argue for abolishing the National Endowment for the Arts have justified their position on the grounds that the NEA funds art that they do not approve of. In many cases, it is because the NEA funds ideas that they do not like.

This is not my objection.

My objection is that this constant threat hanging over the NEA if they should do something that does not serve the interests of various politicians guarantees that the NEA will continue to exist as an instrument for promoting the interests of various politicians.

The vast majority of the NEA funding goes for things that is ordinary - guaranteed not to raise anybody's eyebrows because it is conservative, traditional, unimaginative, and uninspired.

Every once in a while the NEA decides to go out on a limb and fund something new, and a set of politicians stand ready to pounce because the NEA is not serving their political interests.

One of the major reasons that we can expect politicians to defend these programs is because they are politically useful. Every dime of that $1.5 trillion deficit is money that a politician can hand over to a friend or use to make friends – including friends that make political contributions. The only time this does not matter is when the people one would give the money a legislator gets the money to will not support the legislator anyway.

(2) The Economic Benefit Argument

a. The Jobs Argument

The money spent on the NEA provides a genuine benefit to the economy by keeping people employed. If we were to abolish the NEA, it would put a lot of people out of work.

Generally, this is false. $150 million taken by people and given to the NEA to keep people employed is $150 million taken from somebody else who would have spent it keeping other people employed.

Let's say that you are about to spend $20,000 on a Honda. I come along with my computer hacking equipment, take the $10,000 out of your bank account, and I use it to buy me a Toyota.

Have I helped the economy?

Of course not.

What I have done is provided a benefit to the Toyota company that would have otherwise gone to the Honda company.

That's what happens when the government takes $150 million to give to the National Endowment for the Arts. It takes $150 million that would have gone to purchasing one set of goods and services and spent it instead on a different bundle of goods and services. One group of people benefit. Another group of people are made worse off.

b. The Assumption of No Other Funding

Of course, this assumes that the NEA cannot find money from other sources.

That is questionable. But what if it’s true?

If it is true, then the position of the NEA and its supporters boils down to, “You, the government, must force people to give us money – effectively by threatening to use violence (jail time for tax evasion) against those who do not give us money - because they will never give us money out of their own free will.”

That is a hard moral position to defend.

c. The Free Rider Defense

Now, there are some things that the government can spend money on that actually do help the economy. These are things that the market underfunds because they generate free riders or “positive externalities”. One example is national defense. It’s hard to defend 115 Main Street, Sometown USA without defending 117 Main Street, Sometown USA. So, if the person at 115 is paying for a missile defense system, 117 can sit back and enjoy the defense without paying. These types of projects tend to get under-funded. The result is that people are worse off. People can be made better off when the government helps to fund projects that have these types of free riders.

However, the National Endowment for the Arts is not one of those public goods. Like any other performer – a rock band, a dance troupe, a movie or television production, or a play – the performer can exclude those who do not pay. The challenge is to produce something that people are willing to pay for.

Without the free rider defense, if people are not willing to pay for it, then you are taking money from somebody and forcing them to take in return something worth less to them then the money they are giving up. You are taking $1.00 from somebody and giving him something that isn’t worth $1.00. That’s not good for the economy.

In fact, it is a net drain on the economy – to take money from people (by force) and give them something in return that is worth less than the money you take.

Even if we assume that an orchestra or an art museum provides a benefit for a community, it is still only a benefit for the community. What we have going on here is a forced wealth transfer scheme. Money is being taken from rural Americans against their will to subsidize urban Americans. The grocery store worker in New York gets to have an orchestra in his city by sending a portion of the bill to the grocery store clerk in Broadus, Montana.

At its best, this “benefit” argument argues for a tax on people within a community to support the arts in that community. It does not argue for a federal “National Endowment for the Arts”.

d. The Better Things to Cut Argument

Finally, let’s just say that the National Endowment for the Arts, over all, provides some benefit. From this, we can say, “Find something else to cut. Something less useful to the country.”

Well, even if there are $1.4 trillion dollars worth of government programs that are less useful to the country, the NEA still needs to get cut. The only way that the NEA deserves to be saved is if there are $1.5 trillion dollars worth of other programs that are less useful. Those other programs include school lunches, legal aid to the poor, college financial aid, courts and police, homeland security.

Give me a list of the $1.5 trillion that the government is spending money on that is less useful than the National Endowment for the Arts, and you can save the National Endowment for the Arts – assuming that this benefit argument is true (which it almost certainly is not). If you can’t do that, then it is time to let this government program go.

(3) The Low Cost Argument

Another argument that one can expect to hear is, "The NEA costs each taxpayer less than $1 per year".

Well, I guarantee that I can divide the entire $1.5 trillion dollar deficit into a set of programs that cost less than $1 per year. If this is a valid argument – a valid reason not to reduce or cut the funding for something, then absolutely nothing may legitimately be cut from the budget. Everything in the budget is a bundle of projects and products that cost the taxpayers less than $1.00.

Besides, it’s also false. If all taxpayers contributed equally to the government, then it will cost each taxpayer $1.00. However, the premise is false. People do not contribute equally into the tax pool. Some people contribute nothing, others contribute a great deal more. Some people will spend $0 in a year supporting the National Endowment for the Arts. Others will contribute $2.00, $3.00, or more.

Let’s say, I take $30,000 out of your savings account. Heck, this means that the average person in this country household has lost only one one-hundredth of a penny. That’s $0.0001 per American! I can perform 100 thefts like this and the average American would have only lost 1 cent! What’s the big deal? What you getting all worked up about?

While the claim about the average distribution of costs is not false – in these types of arguments it is being used into an attempt to mislead.


Okay, I have ignored the prospect of saving some of these programs by raising taxes. I have only talked about cutting spending.

However, the purpose of this article was not to discuss what programs to cut and what programs to eliminate to balance the budget. I meant this as a posting on the types of arguments one might encounter against cutting a program that are seriously flawed and, thus, have no place in making real-world decisions.

Those arguments should not ignore the fact that any program that is created becomes a tool of the politician to channel money from people he does not like into the pockets of people that he likes (or who he finds it convenient to like him). That is always its first purpose in a political system such as ours.

The fact that a government program employes people does not imply that it creates jobs - not if the money comes from somebody else who could have employed people somewhere else.

Also, it is not enough to argue that the program provides a benefit. It has to provide more of a benefit than other things that one can do with that money. If an investment makes 5% interest this is not a good enough reason to invest money in it - not if it means giving up an investment that would pay 15% interest.

Furthermore, many of these benefits are simply instances of telling people, "Either you will give me your money so that I can get something that I like or you will suffer the consequences." Those consequences are violent - they include arrest and imprisonment for tax evasion all carried out at the barrel of a gun.

And, "It's just a few pennies if you distribute the cost evenly among the whole population," would justify my taking your entire savings account - a few pennies at a time. You would not be able to protest any particular theft because "it is just a few pennies", but a few hundred thousand thefts of that type will add up to real money.

So, as the government begins to work on this project of trying to get our deficit under control, please keep in mind these arguments that people are bound to offer as to why their programs cannot be cut. It might be a good idea to refer to them, from time to time.

Or, we could borrow our country into bankruptcy and economic and political ruin. It’s not as if we have no options.


Anonymous said...

Given the fact that taxation is progressive, it's ethically *better* than distributing the burden evenly across the whole population.

Doug S. said...

Regarding the "jobs argument":

It is not true that "$150 million taken by people and given to the NEA to keep people employed is $150 million taken from somebody else who would have spent it keeping other people employed."

Alonzo, you really need to learn some more economics, particularly Keynesian macroeconomics. What you have described is known as the "crowding out" hypothesis. And, under the prevailing economic conditions in the United States, it won't happen.

The important thing to remember is that not all money is spent, or at least, is not spent very quickly. If you had $20,000 in that bank account and aren't planning on spending it any time soon, then only the fraction of that $20,000 that the bank lends out is going to get spent on goods and services. And, right now, banks aren't lending as much as they were before the financial crisis.

The money that the U.S. Government is taxing and borrowing is, at least in part, money that people want to save for the future rather than spend right away. Normally, when people want to save money for the future, they invest it rather than hold cash, but another result of the financial crisis is that there are fewer good investment opportunities than there used to be. As a matter of fact, we're actually in a liquidity trap right now: there's so much "excess savings" that interest rates would actually have to go negative before people and institutions start spending again, but interest rates can never actually go negative because people can just keep cash instead. People actually are doing the equivalent of "hoarding cash in mattresses" instead of spending it, and as a result, we're in a situation similar to that of the Great Depression. Our economy could be producing a lot more goods and services than it actually is producing because people aren't willing to buy them.

(See also: Paradox of thrift)

So the government is not simply giving a benefit to some people at the expense of others, it's employing productive capacity that would otherwise have been idle. Also, interest rates on U.S. government debt are so low that people are practically offering the Treasury free money; maybe we should actually trust the markets for once when they say that a dollar spent by the government is more valuable than a dollar loaned to the bank?

Alonzo Fyfe said...

Doug S.

If you want to defend the NEA as a temporary make-work program to boost aggregate demand during an economic slowdown, then it first has to BECOME a temporary make-work program to boost aggregate demand during an economic slowdown.

And if you want to defend it as a temporary make-work program, then the key component of that is that it is temporary. It is not a question then of whether it gets eliminated, but when.