The big news around Vancouver is that the city wants to take out a loan — a small one, not even $500,000,000 — to make up for budget overruns in the Athlete’s Village project for the 2010 Winter Olympics:

• Vancouver seeks charter change to borrow $458 million for Olympic Village (CBC.ca)

They’ve already spent a big whack of money on the Village (which they expect to be able to re-sell as condos after the athletes move out; False Creek, for those of you who aren’t familiar with San Francisco North, is a rather nice address to put on your Christmas cards), not to mention the rest of the Olympic facilities and a raft of “civic infrastructure improvement” projects spearheaded by a new light-rail line from the airport to downtown.

For the most part, Vancouverites are proud to be hosting the 2010 Olympic Games — provided that the preparatory construction doesn’t inconvenience them, of course.  I’m thrilled by the spectacle of Olympic athletics, myself, but I do have to wonder why the quadrennial apogee of winter sport — beloved by everyone and bringing together the very best of the world’s athletes — needs to depend upon public funding every — fucking — time.  If the Olympics are so awesome, and if they really do bring in more money by tourism and “world appeal” than they cost, why can’t the IOC find proper sponsorship and run the whole thing as an entirely private concern?  If hosting the Olympics is such a shining star in a city’s development, why is Vancouver begging piteously for help like a Detroit-based car company rather than cherry-picking the very best from a horde of investors anxious to cash in?*

Given that the closest I can afford to get to the 2010 Winter Olympics is walking the long way around a construction site, why am I being forced to pay for it?

That’s the sort of question that gets one written off as a politico-economic curmudgeon — and because “paying for it” is so radically divorced in time and circumstance from the “it” in question, it’s a question that simply doesn’t occur to a distressingly large number of people.  For instance, Kevin Drum:

• Why can’t we have it all? (The Liberty Papers)

So: what’s wrong with government spending to stimulate the economy now, combined with tax cuts and bank recapitalizations to help get the economy in shape for recovery a couple of years down the road? This isn’t so much a suggestion as a question. Does this make sense, or is there some fundamental misconception at its core?

(For those of you keeping track of my citations: Kevin Drum writes for motherjones.com, and is often referenced by Matthew Yglesias and Coyote Blog — and less frequently by Megan McArdle.  I don’t read his blog, but I do tend to come across a lot of his work one step removed.)

Why not spend more money and collect less in tax?  It’s a reasonable question — but unless someone has a pretty damn convincing argument that those proposed tax-collection cuts are going to put us higher up the Laffer curve’s y axis (and no-one has advanced any such argument that I’ve seen), what that’s going to do is increase government debt.  (Even without anything more in the way of public spending and tax-rate reductions, Obama’s warning about trillion-dollar deficits “for years to come”.)  Who’s going to pay for that?

Well, it depends where it comes from.  When government increases spending, the rest of us end up paying for it no matter how they sugar-coat it.  As Brad Warbiany explains in the above article, there are three ways for government to cover increased spending:

1. Increased revenue.  This can be explicit (raising income or sales tax rates) or hidden (reducing eligibility for exemptions or increasing mandatory surcharges on publicly-provided utilities) or even scapegoated (increased import tarrifs on goods from them evil slant-eyed furriners or stiffer fees from red-light cameras), but it always comes from the same folks: us, right here, now.
2. Increased borrowing.  This imposes a small cost on whoever’s paying taxes at the moment (increased service of interest on the larger national debt), but pushes off most of the costs onto future generations of taxpayers.  (See also: Social Security and the CPP.)  It is correspondingly popular among much of the older crowd, who’re well-represented in Ottawa and D.C. and who have a tendency to feel that they’ve paid for the sins progressive and enlightened social initiatives of their ancestors, so their kids can pay for theirs.
3. Increased money supply.  This is really a hidden tax, implemented via inflation: the quantity of money in circulation goes up while real wealth stays the same, so the value of each individual dollar goes down.  This is not so awesome for anyone trying to save money, live on a fixed income, or otherwise manage a given amount of currency.  It can be implemented either by printing more and more cash or by making it easier for banks to borrow money — for example, what the Federal Reserve’s been doing for the past few years.

Mostly we’ve been using a combination of 2. and 3. — the methods which are easier to ignore and more palatable in the short term.

Well, increasing the money supply isn’t necessarily palatable in the short term.  Consider the following:

• Zimbabwe introduces $50 billion note (CNN.com)

Zimbabwe’s central bank will introduce a $50 billion note — enough to buy just two loaves of bread — as a way of fighting cash shortages amid spiraling inflation.

[...]

Zimbabwe is grappling with hyperinflation now officially estimated at 231 million percent, and its currency is fast losing its value. As of Friday, one U.S. dollar was trading at around ZW$25 billion.

When the government issued a $10 billion note just three weeks ago, it bought 20 loaves of bread. That note now can purchase less than half of one loaf.

Realizing the worthlessness of the currency, the RBZ has allowed most goods and services to be charged in foreign currency. As a result, grocery purchases, government hospital bills, property sales, rent, vegetables and even mobile phone recharge cards are now paid for in foreign currency, as the worthless Zimbabwe dollar virtually ceases to be legal tender.

To Zimbabwe’s credit**, they are allowing people to use foreign currency in their country, and they are dealing with the problem of price inflation/currency devaluation head-on (though perhaps not in the most useful way possible).  Skipping across the ocean to another worker’s paradise, we find a rather different story:

• Chavez tries to mask currency devaluation (The Liberty Papers)

The government is already cutting its sales of dollars at the rate it established in 2005, forcing travelers abroad to turn to a parallel, unofficial market where U.S. currency sells at a 61 percent premium. Venezuelans need government authorization to get dollars at the official rate.

“What’s essentially going on is a surreptitious devaluation,” said Russell Dallen, head trader at Caracas Capital Markets, a unit of BBO Financial Services Inc., a Caracas-based brokerage and asset management company. “They’re pushing more people into the unofficial market, so that’s forcing a devaluation on more people.”

Now, that’s all well and good, but what about those tax cuts?  If the feds are borrowing more money and jacking up the money supply, that may be bad, but isn’t it offset by lower tax costs right now?  Um, not so much:

• When a tax cut isn’t a tax cut (Cafe Hayek)

If the government cuts rates or just gives rebates but at the same time increases the size of government, taxes are not lower. They’re larger. Government is taking a bigger share of the economic pie leaving less for the private sector to spend. The future burden of taxes is higher. As Milton Friedman used to argue, don’t focus on how government is financed, whether it’s out of current taxes or future taxes. Focus on the spending. If government grows as a percentage of the economy, then the burden on the private sector is bigger.

Taxes have risen since George Bush became president. Federal spending as a proportion of GDP has increased since 2001. Bush didn’t cut taxes. He rearranged the burden of taxes. But he didn’t reduce taxes. He increased them because the bill for the higher spending will still have to be paid.

(Emphasis added.)

I hope you’re made a bit skeptical by that first paragraph, there: when people talk about one group “taking a bigger share of the economic pie leaving less for” someone else, they’re usually talking about wealth as a static thing — which it fucking well is not.  But Dr. Roberts isn’t talking about an absolute economic pie: he’s talking about a proportional one.

If (as the Keynesians insist) every dollar of government spending increases GDP by more than one dollar, then when government spends money it should increase the size of the pie faster than it increases its own share: in other words, the relative size of government (economically speaking) goes down when it spends money.  If that’s the case, then (so long as this rather simplistic model holds reasonably close to true) governments could spend their ways out of debt: economies expanding faster than expenses provide a larger and larger tax base.

But of course that’s not what has happened: government is instead getting larger.  Buying out Fannie Mae and Freddie Mac was the precursor to buying out AIG and — now, effectively — GM and Chrysler.  Obama’s stimulus plan imagines great FDR-ish public works programmes, though presumably not ones reminiscent of the Tennessee Valley Authority power plants dumping coal-ash slurry into the nation’s aquifers.

So instead of spending money and hoping that the Keynesians have it right and GDP’s going to grow even faster than expenses, we borrow money to be repaid by our kids and grandkids (and so on, and so on — sins of the fathers to the seventh generation and all that).  It seems like a perfectly safe thing to do: after all, even the most lunatic of tin-foil-hatted conspiracy theorists see the feds as a timeless foe and an unstoppable juggernaut.  Bankers everywhere calm down and loosen their lending purse-strings when the government signs on as a lender of last resort.  What, are they going to default or something?  That’s ridiculous.

Isn’t it?

• U.S. government default? (Greg Mankiw’s blog)

Last week, markets pegged the probability of a U.S. default at 6 percent over the next 10 years, compared with just 1 percent a year ago.

Fuck!

——

* Don’t tell me it’s the credit crisis’s fault; this has been going on for far longer than that.

** Nope, never thought I’d type that in a post about economics.