Yesterday, I wrote about how the tangent at the top of a circle is moving in a different direction than the tangent at the side of a circle. Today, I will be explicating something that is just as simple, and just as important.

The economy has been a topic of much conversation since the 2008 Financial Crisis, and there are many opinions about what it is doing, and what should be done about it, both on the most casual level of grumbling in barber shops, to the level of the international elite sitting around at a table in Jackson Hole, sipping glasses of ice water and grimacing. Much of the discussion is not about the positive science of the economy as much as it is about issues of social justice. Is cutting government programs for the poor immoral? Is a rising tax rate a sign of the creeping bureaucratization of a once free nation? I am going to put those questions aside, and instead focus a simpler issue, which is that many economic policy changes, even if they could be done perfectly, would be zero-sum games.

For example, imagine that the government cuts taxes (without making other changes). Since the government is still spending the same amount of money, that money has to come from somewhere. The government will borrow the money, which means that the money will not be used elsewhere to invest in the economy. End result: nothing. Or, let us imagine that the government cuts taxes and cuts spending. If we imagine that the spending cuts come in the form of not hiring (or laying off) workers, there is now more money in private hands... which is going to be used to hire the workers who are now no longer working for the government. Of course, this works the other way as well: if the government raises taxes and uses it to hire workers, that is money that the private sector isn't using to hire workers. If the government borrows money to hire workers, the private sector won't be using that money to hire workers. (Incidentally, as far as taking money from the private sector goes, getting the money by taxing or borrowing is in some ways much the same thing.) Further explications of this type of fiscal policy are fairly easy to see.

This is much the same with monetary policy, the regulation of the money supply. In the United States of America, as in every other industrialized nation, the money supply is kept under the control of a semi-autonomous central bank, rather than under the direct control of the executive. However, even if the government had instant control over the money supply, it would still be facing the same zero-sum problems. If the government could freely print more money, businesses could hire more people and buy more equipment with the money...besides, since everyone else has money, the price of goods and labor goes up. All I am saying here is that money has a nominal value --- one of the basic truths of economics, but something often forgotten. The same would be true of a deflationary economic policy, as well.

There are other examples of this, as well. For example, some have talked about raising the social security retirement age by a year or two. Which will save some money in social security payments... and at the same time close up job openings, which are already scarce.

This isn't to say that economic policies can't have results that are in some way positive, but I have noticed that some basic and elementary facts about the outcomes of various economic policies get covered up behind various forms of ideological moralizing. In general, people should be more aware that there are not many magic bullets in economic policy, since everything that is done has a cost somewhere else.

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