Multiple complaints

October 15, 2011

When I read some statements in the Oct. 3 issue, I found myself grinding my teeth.

Michael Hicks referred to long-dead economists by observing that the British economist John Maynard Keynes proposed deficit spending to help remedy a deep recession. Hicks pointed out that job creation in the U.S. is substantially slowed by the contraction of state and local government—so the Keynesian prescription for the short run is to fill the hole caused by a contraction of state and local spending as well as private spending.

I have no problem with that principle taught in sophomore economics classes. But then he comments that “over the long run” higher government expenditures tend to dampen economic growth. Well that makes sense, too, given that the higher federal spending occurs when the economy is at full employment and therefore crowds out private spending.

There is no contradiction here as long as one is clear about whether federal spending occurs during recessions or full employment periods. Some argue elsewhere in this edition that more stimulus spending is sending good money after bad. However, it was widely felt by economists that the first stimulus package filled the hole left by state and local government, but not that left by consumers and businesses. Thus it makes sense to economists in academia and in the business sector that further stimulus is warranted

Finally we come to a micro economics issue regarding incentives paid to Positron, whose financial statements include a warning that its debt position potentially threatens the firm. Many firms recover from this kind of warning, but the concern I have is a comment by Jim McGoff saying the state is “off the hook” in responsibility for these federal funds if the firm fails.

While that is technically true, nevertheless another economic principle—opportunity cost—encourages decision-makers in the conduit to make the best use of such investment funds. In a recessionary economy $38 million in investment funds is not chump change. Moreover the city of Noblesville is also betting its resources on the deal. It appears, however, that they are intent on prudently managing their funds.


David Weinshrott

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