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Affordability: Resources, Not Money

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"Affordability: Resources, Not Money"

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Probably the biggest thing that trips people up when thinking about countercyclical public policy is a misleading over-emphasis on accounting ledger books as the right measure of what can and can’t be afforded. Making sums add up is important, of course, but it’s more helpful to start by thinking about real resources. People’s time, capital goods, raw materials, etc.

Think about the mayor of a mid-sized city presiding over good economic times. Tax revenues are going up, and demands on social services are relatively low. Suddenly the budgetary picture looks very bright and it seems easy to “afford” longer library hours, more frequent bus service, and tax cuts. This, however, is close to backwards. You can’t manufacture librarians or bus drivers. It’s when times are good that it’s most costly to pull human beings out of whatever else they’re doing and have them drive buses. Similarly, it’s when people are flush that extra money in their pockets is going to go to enterprises with low marginal utility.

Then along comes the crash and suddenly the budget looks bleak. Now we “can’t afford” those extra social services and we need higher taxes. But with household budgets tight, the taxes are much more burdensome than they would have been in good times. And the real social cost of having someone work in a library rather than sit at home unemployed is probably below zero.

What you actually ought to be doing is setting the quantity of social services at some level that makes sense across the business cycle. Then during periods of economic growth, taxes should raise more money than you spend. That way thanks to your stockpile you never need to cut services in the face of a recession and in fact can shower your city with tax cuts during a downturn to families can get by. But of course almost no jurisdiction in America actually does engage in this sort of responsible budgeting, and the Reagan and W Bush administrations took the federal government on a wildly different course. This has bad economic consequences on its own terms, and I also think tends to distort the political dialogue. Since budget deficits are “bad,” it’s unintuitive to say that bigger deficits will help in a recession. By contrast I think it’d be easy for people to see why a surplus-accumulating government shouldn’t try to horde even more money at a time when people are struggling. The reality is that nothing magical happens at zero, and what we “can afford” is ultimately determined by how many resources are available not by accountants.

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