Gov Spending Multipliers – The Right Thing To Do

What is the return on 1 dollar spent? Lots of studies say lots of things. We dont really know anything more than if that dollar is being spent, it actually generates a financial action of some sort.  At this juncture, it seems that the conventional wisdom is that any fiscal action is better than standing still. I wish we had an obvious solution.

One thing I do know however is that in order to spend a dollar, you have to have a dollar. If you dont have that dollar, you have to acquire it in some manner. Its this part of the equation that everyone seems to forget when it comes to discussing government spending and the resulting financial “multipliers”

The government can generate revenue primarily through taxes and borrowing.

Both have a very different cost of acquisition.

Borrowing is a negotiated cost, the interest rate we pay, plus the overhead associated with transferring the receipts from source to destination. Again, a cost that is for the most part definable. So for borrowed money, we know what it costs to turn that into a dollar spent on infrastructure or whatever the government decides to spend it on.

Taxes however are a different beast. The cost of acquiring tax money is much, much higher.

First there is the cost of persons and businesses to account for taxable items. Then there is the cost of paying those taxes. Then there is the lost opportunity cost of the taxpayers to invest that capital elsewhere.  Then the government enters the picture. The cost of the IRS to  capture, regulate and enforce, the cost of getting the money from tax payment through the jungle of government bureaucracy, through the bid, analysis and purchase order process to the actual hiring and cutting of the check to the contractor/vendor.

So in order for the government to capture a dollar to “invest” in the economy, they have the choice of spending a fortune and reducing private investment through taxation, or they have the variable, but determinable cost of borrowing. Put another way, it costs $2 to collect $1 dollar of tax money in order to invest that $1 to get a 1.5x multiplier or $1.50 of return.

So let me offer a solution that makes too much sense to ever happen.

1. Reduce Taxes.

2. Borrow the amount needed to make up for lost tax revenue.

3. If foreign borrowers dont want to continue to  pay for all of this debt or out of principal alone, bring back something similar to Savings Bonds. Make them available exclusively to individuals and corporations.  5 and 30 year notes that pay a premium to Treasuries. The premium will still be cheaper than the transactional cost of pushing tax receipts through the system.

Borrowing is a cheaper source of funds then taxes. Period end of story. Time to learn it and use that fact.

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