Naked Economics: Undressing the Dismal Science pdfdrive com

Income inequality. We care about the size of the pie; we also care about how it
is sliced. Economists have a tool that collapses income inequality into a single
number, the Gini index.
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On this scale, a score of zero represents total equality—
a state in which every worker earns exactly the same. At the other end, a score of
100 represents total inequality—a state in which all income is earned by one
individual. The countries of the world can be arrayed along this continuum. In
2007, the United States had a Gini index of 45, compared to 28 for France, 23
for Sweden, and 57 for Brazil. By this measure, the United States has grown
more unequal over the past several decades. America’s Gini coefficient was 36.5
in 1980 and 37.9 in 1950.
Size of government. If we are going to complain about “big government,” we
ought to at least know how big that government is. One relatively simple
measure of the size of government is the ratio of all government spending (local,
state, and federal) to GDP. Government spending in America has historically
been around 30 percent of GDP, which is low by the standards of the developed
world. It’s climbing right now, both because the stimulus is driving up
government spending (the numerator) and because GDP has been shrinking (the
denominator). Government spending in Britain is roughly 40 percent of GDP. In
Japan, it is over 45 percent; in France and Sweden it is more than 50 percent. On
the other hand, America is the only developed country in which the government
does not pay for the bulk of health care services. Our government is smaller, but
we get less, too.
Budget deficit/surplus. The concept is simple enough; a budget deficit occurs
when the government spends more than it collects in revenues and a surplus is
the opposite. The more interesting question is whether either one of these things

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is good or bad. Unlike accountants, economists are not sticklers for balanced
budgets. Rather, the prescription is more likely to be that governments should
run modest surpluses in good times and modest deficits in tough times; the
budget need only balance in the long run.
Here is why: If the economy slips into recession, then tax revenues will fall
and spending on programs such as unemployment insurance will rise. This is
likely to lead to a deficit; it is also likely to help the economy recover. Raising
taxes or cutting spending during a recession will almost certainly make it worse.
Herbert Hoover’s insistence on balancing the budget in the face of the Great
Depression is considered to be one of the great fiscal follies of all time. In good
times, the opposite is true: Tax revenues will rise and some kinds of spending
will fall, leading to a surplus, as we saw in the late 1990s. (We also saw how
quickly it disappeared when the economy turned south.) Anyway, there is
nothing wrong with modest deficits and surpluses as long as they coincide with
the business cycle.
Let me offer two caveats, however. First, if a government runs a deficit, then
it must make up the difference by borrowing money. In the case of the United
States, we issue treasury bonds. The national debt is the accumulation of deficits.
Beginning around 2001, the United States has been consistently spending more
than we take in. It adds up. The U.S. national debt has climbed from a recent low
of 33 percent of GDP in 2001 to a projected 68 percent of GDP by 2019. If the
debt becomes large enough, investors may begin to balk at the prospect of
lending the government more money.
Second, there is a finite amount of capital in the world; the more the
government borrows, the less that leaves for the rest of us. Large budget deficits
can “crowd out” private investment by raising real interest rates. As America’s
large budget deficits began to disappear (temporarily) during the 1990s, one
profoundly beneficial effect was a fall in long-term real interest rates, making it
cheaper for all of us to borrow.