Government spending in crisis times

Governments can spend money in the economy for different purposes. First, they are often in charge of the major infrastructure, airports, railroads and roads and need to maintain them at competitive level with neighbour countries. This is good for the internal economy. To give an example, governments may spend money on satellite navigation and traffic telematics services, in order to enhance traffic mobility, which is sound for the competitiveness of the region or country.

Moreover, the investments often generate spin-off in other areas of the economy (e.g. location based services), which is good for the economy in general. Governments also spend money on regional reconversion, as the required investments usually exceed the potential of private initiatives. Governments tend to insure all major risks that can't be carried sufficiently by private people or organisations (e.g. rebuilding areas struck by natural disasters like floods and earthquakes). The government spending described above is considered useful in both crisis and non-crisis times.

In crisis times, there is pressure for additional spending. On the one hand, governments are asked to save the public from major economic disasters, like bank bankruptancies (strange combination of words). Consistent with this, governments need to provide the masses with sufficient income to maintain the internal demand (Keynes) and prevent social disorder. There is the general feeling that all this is difficult to do without creating national debt. Very much generalised, the 'republican' thinking emphasises reducing or stopping government spending as a solution. The 'democrat' thinking emphasises the maintenance of social justice or the prevention of social disorder. (Sorry to use these terms in this context, but it seemed the best way to clarify.)

What governments actually do is usually a compromise, balancing every 8 years between left and right, and usually plagued by a nasty third party standing aside. The general public has the feeling government spending has not dropped, as budgets seem to be maintained from year to year. In reality, the spending has dropped, not because the budgets have dropped, but because the approval cycles have slowed down. The current crisis does not only affect the behaviour of the private industry. It affects the behaviour of everybody deciding on expenditures. Public officials have become more critical, decisions are taken at a slower pace, therefore approval cycles for public tenders or R&D programmes take a longer time. This also reduces the average spending rate, although it is more difficult to put your finger on it, and prove that the expenses are actually lower than they should have been.

Let us hope that reason will prevail at some point  in time over the current 'crampy' behaviour and that this reason will lubricate the economic engine again. But the 'reason' should come from all decision makers, not only from government members. I also refer to my past blogs on voting behaviour and on the role of greed and generosity in this crisis. (Picture: freefoto.com)