Wednesday, April 12, 2017

Does Government Redistribution Affect Output?

While government redistribution can supplement aggregate demand to a degree, it's an approach which could eventually mean cumulative detrimental effects on aggregate output. This post title question is also another take on secondary market imbalance, in relation to the wealth creation of primary markets.

When the historical context is right, fiscal policy can contribute to the growth of a given equilibrium. Indeed, vast improvements in twentieth century living conditions for the southern U.S. provide an apt example. However, these improvements can be attributed to what were fiscal purchases in the form of new infrastructure commitments.

One might liken those earlier fiscal purchases to citizens getting "a leg up" from government. It was especially a boost for those who had previously lacked economic access, who now could put their own economic energy into motion. Their subsequent inclusion in the formal economy also translated into vast supply side gains.

However, fiscal contributions such as this and the multipliers they may include, are different from the ongoing maintenance of government redistribution. While the fiscal purchase approach contributed to local self sufficiency, ongoing fiscal redistribution detracts from the potential of local self sufficiency. Once people lose the economic means and ability to productively engage with others, it's easy for society to fall into the trap of believing they are not able to do so.

This 20th century fiscal contribution was also possible, because of the extent to which the economy was still defined by ongoing gains in scale and output. Unfortunately, fiscal transfers became more prominent as the 20th century equilibrium structure gradually matured. When populations become too reliant on redistribution, these government transfers can slowly diminish or even reverse the mechanisms of wealth creation. In particular, too many activities are being subsidized from pools of revenue which have already experienced redistribution from earlier wealth creation. Even in the best of circumstance, a certain amount of nominal spending is liable to be lost, when patterns for new wealth creation are not carefully nurtured and maintained.

Much of today's dominant services sector activity is already exposed to recirculating monetary flows. Even a century earlier, government purchases were a simple matter of tapping the abundant output of wealth from tradable sector activity. Today, when more revenue sources are sought, chances are those potential sources have already been exposed to redistribution dilution at least once.

Plus: while increased output has been a logical revenue source in recent centuries, time based services product doesn't yield comparable output gains - a factor which is only exacerbated by costs which include subsidized access. Yet the different nature of government purchases versus today's subsidy related government transfers, has yet to be discerned. In a recent essay titled "Is something really wrong with macroeconomics?" Ricardo Reis expressed his concern re fiscal policy:
I could have pleaded for research on fiscal policy to move away from the over-study of what was the spending of the past (purchases) and to focus instead on the spending that actually dominates the government budget today (transfers). 
Perhaps this research can still take place.

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