A spending problem? What is the right level of spending?

I saw a Facebook post the other day that mentioned that "the problem with our deficit is that congress has a spending problem." It's a sentiment that I've heard many times, and while it's not surprising that this generally comes from conservatives (it is, after all, not exactly a common liberal complaint), what I find fascinating about the statement is that it's ironic coming from folks who are very market-oriented.

Let me quickly say that I have no problem with the sentiment being expressed here. I am extremely worried about our deficits and debt, and spending is obviously one of the two ways you can address these huge problems (the other, obviously, is revenue). While I personally think we need to address both spending and revenue, my point in this post is not to make an argument about that particular issue, if only because I don't think I have anything particularly enlightening to add to that discussion.

Rather, I want to focus on two somewhat more esoteric points:

1. The amount of spending is "correct".
2. Politicians are not addicted to spending

Huh? Am I making some liberal argument that we aren't spending too much? No, no, don't worry - I do agree we are spending too much. But the amount of spending is nevertheless the "correct" level, in that it is the best level as determined by the relevant marketplace (in this situation, Congress).

Allow me an analogy. What is the correct price of a share of, say, Microsoft? That is fundamentally an unknowable question. There are lots of ways to compute it, but they don't all agree. We generally view markets as the best way to determine such prices, and when we say that a share of Microsoft is worth, say, $25.50, that doesn't mean that everybody agrees that it should be $25.50. Some people believe it should be higher (and they're generally buying), some believe it should be lower, but this is the price where such forces balance out. At a broader level, the level of the Nasdaq index is a similar process, just one level higher. after all, nobody really buys or sells "the Nasdaq index", instead they just do the aforementioned process with each of the constituent stocks of the index and the index rises or falls as a side effect of these thousands of individual price movements. So if you ask "what's the correct level for the Nasdaq," you're really asking a nonsensical question. The correct level for the Nasdaq is not a particular value, but rather a process, and as long as it is computed correctly from its member stock values, then it is at "the correct" level. It may be a bubble, it may be oversold, but it is nonetheless "correct" and it is meaningless really to suggest that the value should be higher or lower. (Predicting where it will go is another matter altogether, but that is not the same thing as saying it is "wrong".)

Congressional spending is really the same way. The total spend is not something anybody formally agrees on really. Rather, it is a whole bunch of individual spending decisions: defense, social security, etc. Like the stock market, each of these individual spending items has people who think spending should be higher and those who think it should be lower, and the ultimate value in the budget is not correctly viewed as a "consensus" level so much as a "market clearing" level. And to continue the analogy, the total budget is analogous to the Nasdaq index: it's just the result of thousands of smaller market-clearing decisions.

The analogy carries one step further as well, actually. The stock market, for all of its efficiencies, is still a rather imperfect pricing mechanism, which is why prices swing, bubbles form and deflate, and so forth. But we use it because it's better than any alternative yet devised. I do not need to point out the flaws in our government's budget process (often compared to sausage making), but democracy, like the market, is also the worst possible way to do this, with the exception of all the others that have ever been tried. (Apologies to Churchill, who I believe is the source of that).

But the larger point here is that if you don't like the level of spending on an individual item (whether you think it's too low or too high), it is generally the result of something akin to a market process. If you don't like the result of it, you really have two options: (a) get involved and start buying or selling in that "marketplace", or (b) get the process changed. Note: the former is generally easier than the latter.

Which brings me to the second point. We don't have a spending problem per se. Politicians do indeed spend money, but they're not spending it on themselves (other than corruption, which thankfully is a minor problem in the US), so it's hard to see them doing it to serve some personal need that they have. I think a far better explanation is that politicians are addicted to their jobs (or to power), and spending is a powerful tool for satisfying that need.

More to the point: politicians don't spend money just to spend it. They do it for constituents. They build roads in their districts, steer contracts to their districts, spend money on things that their voters believe to be important such as national defense or social security and so forth. Which means that in the end, it's the voters who receive the benefits of the spending.

There's an important corollary to this: we all complain about the overall level of the budget and say that spending is too high (and we're right), but the problem is that pretty much all of that spending is going to things that somebody wants. Everybody has ideas about where spending should be cut, but there's very little consensus among those ideas for this reason. So it all gets worked out in the aforementioned budget "marketplace", as a huge aggregation of individual spending decisions.

We have met the enemy and it is us, not the politicians. If we really want to reduce overall spending (and I reiterate that I am in that camp), the only effective and non-reckless way to do it is to slog it out item by item in the budgeting marketplace. Focus on the individual spending decisions and the "budget index" will fall.