Capitalism 101: You Have to Spend Money to Make Money

There’s a new meme going out through the Republican world that I just noticed the other day when I checked Facebook (remember when I warned about the lies that would be coming http://chuckingrocks.com/?p=189).  The talking point is that Obama is a dummy for thinking that the way to fix the economy is by spending more money.  I mean, what a moron, right?!

If you said yes, the joke’s on you.  Anyone who believes that you DON’T have to spend money to make money, is an idiot that doesn’t understand how capitalism or economics work.

In all seriousness, this is why austerity economics is killing Europe right now—those governments have refused to spend money to fix their economies,  which, as Obama and any reasonable capitalist knows, is horrible policy.  Just look at the results.  Spain is on the verge of bankruptcy, not because the government spent so much money, but because they experienced a housing bubble very similar to what we had in the this country, and, instead of a stimulus package (which did work, contrary to Rush Limbaugh’s lies: http://www.usatoday.com/money/economy/2010-08-30-stimulus30_CV_N.htm) they got strict austerity.  It doesn’t work.  A government cutting spending does not somehow magically put more money in the hands of its citizens or spur business growth, and in the face of a recession, believing that austerity will somehow miraculously fix everything is asinine.  If you want to know more about the specifics of austerity, read Paul Krugman.

Anyway, what good economic policy boils down to, and what any business owner knows, is that you have to spend money to make money.  Perhaps the most basic example is a restaurant, which obviously must buy food before it can sell it to diners for a profit.  They have to spend money to make money.  This example can be repeated for nearly any business.  Pharmaceutical companies must spend money developing drugs, before they can sell them to make a profit.  A factory must spend money on equipment, raw materials, and labor, before it has a finished product it can sell for a profit.  The owner has to spend money in order to make money, and they often have to borrow money to do it.  I could go on, but this is basic economics—indeed it is the very nature of capitalism—and anyone who doesn’t accept the above is a plain fool.

Really, the government, as it relates to the economy, is no different.  The government functions on taxes, and though taxes are very complex, there are really only three ways the government can alter what it collects from taxpayers: 1) it can change the tax rate, 2) it can change the number of people/entities who pay taxes, or 3) it can encourage the growth of GDP or the total wealth of the nation, because as anyone knows, even with a flat tax, the more people make, the more taxes they pay.

Currently, the government is running a deficit—in layman’s terms we spend more than we take in.  Now, we could argue about spending all day, but for our purposes let’s focus on revenue, because if tax rates stay the same, the amount of revenue the government takes in is a clear marker of the economy’s health.  Simplistically, revenue is down for two of the three above reasons: the overall tax rate is lower than it has been previously, and fewer people/entities are paying taxes because many companies went out of business and there is high unemployment.  As most of us know, our GDP is growing; the Fed announced just the other day that it expects growth to continue at above a 2% rate for the next few years.  The problem is that this is not leading to significantly higher revenue collection because of the two reasons just mentioned.  So what should the government do?

Like any business, the government has to spend money to make money.  If the federal government went out right now and spent a trillion dollars building new roads, railroads, airports, hospitals, and schools, fixing bridges, improving the electrical grid, and giving states money to hire more teachers, etc., the government can recoup far more than its initial investment.

How?  Not only will the improvements in infrastructure directly benefit business by improving transportation and energy efficiency, but there will also be a large group of workers that will have had steady, good paying job for 5-10 years who will be spreading those wages throughout the economy.  Additionally, by employing teachers and investing in education, we ensure that the next generation of entrepreneurs, scientists, doctors, lawyers, engineers, teachers, etc. are skilled and will continue to produce a healthy economy.  All of this will serve to lower unemployment and boost demand, which will then create a virtuous economic cycle.

In the end, the government will collect more in taxes, because more people/entities will be paying (new businesses and new employees), and everyone will be making more money on average due to a rising GDP.  Once we get back to full employment, then we can start to cut back on government spending and pay off the deficit.  This is not my original idea; I’m merely repeating what many economists, far smarter than me, have said ought to be done.

By the way, you might recall that we’ve done this before.  During the Great Depression, FDR spent money on infrastructure putting people back to work, and to piggyback on that, shortly after, the government spent a great deal of money buying war materials and products for World War II, all of which created jobs in the short run, and a virtuous economic cycle in the long run.  Even Eisenhower, a Republican, understood this, when he built the interstate highway system.  Oh, and nearly all of the money they spent was borrowed.  So, this isn’t some harebrained, untested theory; that the government can provide a short term boost to the economy, and probably should during recessions and depressions, is economics 101, and frankly, people that don’t believe this are just plain stupid.

To look at it another way, think of the government as a business that has operating costs higher than its profits.  That business has two choices, right?  They can either close up shop and cut their losses, or they can spend some money to renovate and make other changes in their business that will increase profitability.  Now remember, going out of business usually doesn’t lead to wondrous prosperity for the failed ownership.  More often it leads to poverty.

This is essentially what our economic choices boil down to: on one side, we have the Republicans, who want to quit trying, give up and close the government down.  Republicans want to operate the government, essentially, only to maintain a military and to enforce a strict religious social agenda.  That’s not what I’m saying, that’s what they’re saying.  So, if you want that, then you should vote for Republicans, and you should expect the economy to tank.

On the other side, we have Obama and the Democrats, who know that if we retool the business of government, we can make it work, and not just to provide for the military, but to stabilize the economy, serve as a protector of justice, promote the general welfare, provide opportunity for the least among us, and to establish a safety net for citizens that fall through the cracks.  You might recall that these types of things are in the preamble of our Constitution. http://www.archives.gov/exhibits/charters/constitution_transcript.html

Look, there is no reason that the U.S. government cannot operate within its means, and there is no reason we can’t, in time, pay off our debt.  However, there is no way we can do this if we don’t spend some money to get our economy back on its feet, and that means improvements in infrastructure, investments in educations, and a general march toward full employment.  No entrepreneur ever made money by refusing to invest in their company or take a risk, and anyone who says the U.S. government shouldn’t spend money to stimulate this economy, is an idiot that doesn’t understand economics, or capitalism.  You have to spend money to make money.

About The Author: Jay Scott

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