Imagine someone will give you $10 for one hour of work. Now imagine that he will give you two hours of work if you agree to be paid $9 an hour, three hours if you agree to be paid $8 an hour, and so on up to ten hours. At ten hours, you would make the same amount as you would have for one hour of work, and so, at some point, it becomes illogical to trade wages for hours. Consider the following:
At five hours, the trade-off between wages and hours becomes illogical and counterproductive. For no reason should we work for more than five hours in the described scenario. This is the point where reducing wages to increase hours ceases to be an effective political, federal, business, and/or personal policy. If theoretically this point couldn’t be determined, this trade-off might be too risky to entertain.
When government stimulus reduces the spending power of the dollar in order to improve the labor market, in essence, the government engages in a trade-off between wages and hours: the value of wages is traded for an increase in employment (and/or hours). When a person makes $10 but the spending power of that $10 drops, the person in effect makes an amount less than $10. Yes, the person will still receive the same paycheck, but $10 amongst low prices is worth more than $10 amongst high prices. Any trade-off between spending power and employment is essentially the same as the trade-off described above in the graph, even though the person may seem to receive the same pay. The same logic holds if a person’s taxes increase to provide employment versus “the entire pie” grow to increase employment opportunity.
If a worker continues to receive the same amount of money but that money has less spending power, the worker receives a lower paycheck. If a worker who makes $10 an hour (the price of his lunch) gains an extra hour of work and his wage increases to $11, but his lunch now costs $12, he actually hasn’t gained as much in his earrings as it first seems. Considering this, if in order to gain that extra hour of work and $1 increase in wage, the cost of lunch had to increase by $2 (which basically occurs when the Fed increases employment by trading spending power), wages have been traded for hours. There are many different manifestations of this trade-off, sometimes involving taxes, other times stocks, etc., but regardless, whenever the government stimulates the economy, and that stimulus does not result in the creation of value to back that stimulus and corresponding debt, the government trades wages for hours. And make no mistake, up to a point, the policy works.
The government trades wages for employment to stimulate the economy, to provide employment opportunities by which revenue can be garnered by citizens. Additionally, the government can trade the wages of one person to increase the hours of another, so the costs of the trade-off can be hidden and even mitigated. Once equipped with money, the citizens can then spend that money, and so the government can stimulate the economy through their spending. The government even tries to grow the economy by trading wages for hours, and up to a point, assuming the motivation of the average worker stays constant (which the government might be able to assure if it’s careful with its language), this can work.
Considering the chart, and to put the argument of this section another way (though arguably too simplistic), “The Philips Curve” will prove to be true until around the 5hr or 6hr mark, but after that point, it is probably the case that, rather than increasing inflation correlating with higher employment, higher inflation will suddenly lead to less employment (in line with the claims of Milton Friedman and Edmund Phelps, and especially if the employed have other options for survival than employment). Likewise, assuming human motivation remains constant, increasing the money supply and implementing robust fiscal policy (such as infrastructure projects, increasing spending on education, etc.) will help economic growth until around the 5hr or 6hr mark, at which point increases in the money supply and fiscal spending will probably translate into ever-worsening economic conditions. The rate at which it will do so will be relative to the rate at which people become aware that inflation is ceasing to stimulate the economy, which will perhaps be expressed by the degree the market panics and rapidly oscillates. It’s hard to say; in fact, it is theoretically possible that people never realize that inflation is ceasing to work, and so theoretically possible that “The Philip Curve” will always apply. But this strikes me as idealistic, for even a fool can go on only so long before he realizes that his quality of life is falling.
The Federal Reserve’s dual mandate compels it to increase total GDP and (beneficial) employment/hours at any cost, like the worker who is willing to suffer low wages (and arguably injustice) to make higher revenue. But as with that individual, there is a point where the trade-off between wages and hours becomes illogical and self-destructive. If this point is impossible to determine, the worker, like the Federal Reserve, plays with fire.
The government “spends through debt,” per se, meaning that it creates money through a loan that it then “shoots” into the economy hoping to create an amount of value greater than that which the loan was for so that it can pay off its debts while simultaneously creating economic growth (arguably, debt is just another form of currency). To the degree the government stimulates the creation of wealth greater than the debts it incurred is to the degree it acted rationally and did not reduce the spending power of the currency (and perhaps even strengthened it) (please note that this means debt is not always bad — I do not want that to be misunderstood). On the other hand, to the degree that the government stimulates the creation of wealth lesser than the debts it incurred is to the degree it acted irrationally and reduced the spending power of the currency. This is “inflation,” which seemingly is the trade-off of “wages for hours.” And, to stress the point, inflation can be beneficial, especially if it stimulates productivity that wouldn’t have otherwise happened, redeeming the trade-off. The problem, however, is that at some point “the trade-off between wages and hours” becomes risky and detrimental (unless perhaps there is a Global Debt Bubble and system of “debt deterrence,” but that is another topic for another time).
If all money the government created and spent generated value “justifying” that debt, no government spending would cause inflation, entail a trade-off between wages and hours, and all spending would grow the economy. However, since not all spending is investment, some spending causes inflation, while other spending does not. Hence, some spending participates in the trade-off between wages and employment, while other spending covers growth without a trade-off.
Making it difficult to identify mere spending from investment, it’s difficult to even tell that the inflationary trade-off is happening because the trade-off is spread out across the whole economy and/or through the future. It manifests as an increase of ten cents here, four dollars there, while at the same time government stimulus can “directly” increase our wages by $10 an hour (resulting in us perhaps having a multi-thousand dollar increase in our earnings). When it comes to debt, (apparent) evidence gives us reason to believe we are in fact becoming richer, and only “possibilities” suggest we aren’t ultimately as rich as we think. When debt is incurred to stimulate growth, present evidence will suggest the loan is working, and perhaps it is if the debt equals investment.
Government spending that doesn’t cause inflation is spending that stimulates wealth-creation which inflation reduces: the government can create what it destroys and destroy what it creates. It is the government that stimulates the wealth that makes possible the trade-off between wages and employment, and yet it is the government which can take away or undercut the spending power of that very wealth with overspending. To the degree spending isn’t investment is to the degree government spending trades the value of wages for an increase in employment (which is perhaps indeterminable though guessable according to the methodology presented in “Joy to the World” by O.G. Rose). At some point, this trade-off can become irrational and self-destructive, though it is not easy to say when.
Imagine if we borrow $1, we will create $10 of actual wealth. In that circumstance, it is rational and economically beneficial to borrow (assuming we can sustain ourselves until we make the $10, which might not be an assumption we can make). Imagine that if by borrowing $2, we will create $9; if we borrow $3, $8; and so on. If every time we borrow a dollar more, we make a dollar less, there is a point where it is illogical to borrow more money. As this graph shows, that point is $5:
In the noted trade-off, there is a point at which the amount we borrow can at best return the same amount. At that point, there is nothing to gain from borrowing, and further borrowing would prove counterproductive.
At the point where the government causes it to be illogical to trade wages for employment is the point where borrowing money no longer creates wealth. The government creates wealth by stimulating productivity, but the point where spending ceases to stimulate productivity is the point where its borrowing ceases to return wealth. Therefore, the point where trading wages for hours becomes detrimental is the point where government “debt spending” to stimulate growth becomes detrimental. This “irrational point” is eventually reached through inflation, and that point is when further government stimulus is irrational and self-destructive (unless perhaps continually borrowing money is the only way to keep creditors from calling in debts). But can we even tell the difference between government spending that creates value and government spending that doesn’t? Perhaps — “Joy to the World” by O.G. Rose makes an argument for how — but even if we could, can we determine the “irrational point” where government stimulation becomes self-destructive? Hard to say.
If the “irrational point” is indeterminable, say because the complexity is too great for determining when trading the strength of the dollar for the strength of the economy ceases to be rational (perhaps a Hayekian concern), then government spending to stimulate the economy is very risky, for though it can work, we cannot know the point when it will cease to work, and if we cross that point, it might be too late to go back. Furthermore, making such a retreat more difficult, evidence up to the “irrational point” will likely show that government spending works, and so give us reason to believe that if we keep spending, greener pastures will follow. Additionally, if it is in “the nature of government” to continue in a direction once it has begun in that direction, government spending should be avoided, or at least considered with great fear and trembling.
Perhaps “greener pastures will follow” if suddenly, after ten years of failed and/or “irrational” stimulus, continued stimulus generates an invention or creation of value that “makes up for” all the years of failed stimulus (and so re-sets the trajectory of the trade-off between wages and employment). Perhaps there can be hope, but the likelihood of that hope manifesting perhaps depends on what degree government spending focuses on technological investment. If the government cannot so focus its stimulus, this could be a problem.
Government spending is playing with fire. Fire can keep us warm and save our life, but it can also take our life. Government stimulus can indeed work, but if the “irrational point” cannot be determined, then government stimulus is a huge risk, a risk that we might not know when it turns bad to know we need to cease the stimulus (and furthermore, with evidence of the stimulus working up to that point, any “souring” will likely be seen as only temporary). Considering all this, relying on the imperfect free market may be safer and necessary under the high majority of circumstances, though as Milton Friedman and Anna Jacobson Schwartz wrote in A Monetary History of the United States, 1867–1960, it is conceivable that, in an emergency situation, monetary policy could be used to ward off an economic crisis. But this tool must only be used with great caution, and admittedly determining what constitutes a true “emergency situation” is not easy.
To conclude, this paper doesn’t intend to argue that government stimulus necessarily fails, but that there is necessarily a point where stimulus will fail. Additionally, this paper seeks to warn that not only is it the case that this “irrational point” might be indeterminable, but that once it is crossed, it might be nearly impossible to change the direction of spending as the society and government are so used to the direction things have been going in, a direction that, they may argue, has been shown to work. But if we have already crossed the “irrational point,” and if we are at a place where further government spending is necessary to keep the economy from collapsing, we have created a devastating situation. Perhaps the government could spend in a focused and concentrated manner that generates innovation and/or productivity to back its debt? Perhaps, and where we currently stand fiscally, I’m not sure. Honestly, I question whether it is possible for anyone to know.