A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

1. Taxes today.
2. Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.
3. Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements  (refinements by the way he did not neglect in his text, just did not put in the formula).  One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness.  So we will write the equation

G = Taxes + ΔDebt  + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the “taxes” term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t.  So then we get:

G = GDP x t + ΔDebt  + Money Printing + Aid

The Greeks can’t print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany).  If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed.  The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested.   Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source  (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government.  Since Aid is currently only be granted tied to “austerity” programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus.  First, I have heard something akin to this in my personal experience.  For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down.  The plan I got from management was always – always – this stimulus approach.  They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do.  So we shut most of these efforts down.  Your first loss is your best loss, as they say.

Similarly, I don’t think Keynesians can point to any example in history where this actually worked.   A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide.  Seriously, do people honestly think this will work?  Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases.  I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

Everything old is new again.  Back in the late 70′s, all the talk was about the world running out of oil.  Everywhere you looked, “experts” were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn’t have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms….

 Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions. …

The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25….

All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high.

Postscript:  I really need to find new topics to blog about.  The adjacent article in 2005 included this, a frequent topic on this site.  I had not idea I was writing about this so long ago:

When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state’s health care costs, to justify regulating the crap out of that behavior.  Already, states have essentially nationalized the cigarette industry based on this argument.

Portland’s TriMet agreed to allow transit workers to retire at age 55 after as little as ten years on the job and gave them and their families free medical care (with a $5 co-pay, no deductible) for life (plus 16 years after the retiree’s death for their families). As a result, health-care costs have grown from $18 million in 2000 to $68 million next year and projected to rise to $153 million–40 percent of the agency’s 2010 operating budget–by 2020.

* footnote:  I leave this in a footnote because I don’t want to be seen as breaking Godwin’s law by bringing up the Nazis, but its almost impossible to talk about modern campaigning techniques in the age of mass media without mentioning them.  They pioneered many of the techniques used by about everyone nowadays.  One thing they did was to create focused messages for different groups — tailors or farmers or city people or industrial workers or Catholics or whoever.  They were incredibly cynical in how they did this, even by modern standards, and didn’t really care what the message was, and so ended up with wildly contradictory promises, e.g. promising farmers higher prices for their produce and promising urban laborers lower food prices.

via here

The UK line is particularly interesting, since that is the country that Krugman has declared is austerity-izing itself into a depression. As I have pointed out before, real government spending in UK has been and is still rising.  The percent of GDP of this spending has fallen a bit, but there is nothing about Keynesian stimulus theory that says changes in the percentage of government spending is stimulative, only its absolute value.

Here is one thing I would love to here Krugman et. al. opine on — at what percentage of government debt to GDP does additional deficit spending become counter-stimulative.   I imagine there is an inverse relationship for deficit-funded stimulus, such that it has a larger effect at lower debt levels with a zero to negative effect at higher interest levels.

Update:  From another source, here is the UK in real $

These are private schools in a private league, so I guess they can do whatever they want, but this just seems bizarre in the extreme.   I would guess that their players were irate.

My son plays in the smaller division of the AIA, and we run into teams that play girls from time to time in baseball and a bunch of schools that play girls on their soccer team (the rule generally is that girls can play on the boys team if there is no girls’ equivalent of that sport at the school).  I have never before heard of another Catholic school having a problem with this, and given that this is Arizona, there are a lot of Catholic schools knocking about.

In fact, I always find it kind of cool to see girls out there.  I remember a few weeks ago we were playing a team who had a girl at third base who the boys thought was pretty attractive.  I laughed pretty hard when my son took a big chance to stretch a double into a triple.  I knew exactly what he was doing –he wanted to be on third base!

I suppose this will be a better object lesson for the Catholic boys than any gender-equality propaganda film.   Adopt Victorian attitudes about women, lose the chance to play for a state championship.

One trick environmental sites will play is to Photoshop the contrast and darkness of the steam plume to try to make it look smokier.  Here is a good example

This photoshopping of steam plumes to make them look like smoke is prevalent enough that I have written about it a few times.  That is why this image tickled me.  I don’t know the artist.  He may be making the opposite plea (e.g. turning smoke to steam) but I’ll interepret it the way I like:

Postscript:  This is my all-time favorite image in this category:

This image was used by Battelle labs (update:  still is) to illustrate their air pollution expertise.  The sad-faced girl with the inhaler is classic, but what makes this my favorite is the water vapor plume from the nuclear plant (you can see the nuclear reactor dome).  The water vapor from a nuclear plant cooling tower has only pure water — it has no combustion products and no particulates that might give this poor girl asthma.  It does not even have any CO2 in it, if that is your particular bogeyman.