Thursday, February 23, 2012

Spending and the danger in a positive-feedback loop

I don't know where I read this idea originally, perhaps The Economist. There is a major problem in spending financed by borrowing. In most spending, you have to work hard for the money, so you balance the pleasure of spending with the pain of earning. But with borrowed money, the connection to the pain or hard labor is lost, so you spend more freely.

With governments, the pleasure is giving constituents what they want without the constituents paying directly. But the pain comes in the form of taxes. With borrowing, the pain of taxes is reduced, so the pleasure of government spending is left without enough balance. Because the pain is artificially reduced, the demand for government spending swells.  With swelling demand, the government tries to borrow even more. That again reduces the pain of taxes to support the spending, the people get their pleasure (services) without the full pain, and they want even more.

This is a positive feedback loop, which is an extremely dangerous thing in nature. It's at the heart of the atomic bomb, the mood disorder of mania, and financial bubbles. It is inherently unstable because ramping up during iteration after iteration causes the system to use up its resources very fast.
 Positive Feedback Loop = Unrestrained Demand = Bubble

Most of nature runs on negative feedback loops, which keep systems stable. Spending with the necessity of earning or taxing is in this category. We've been in a positive feedback loop in our government spending for too long. We need to get back to the more natural and more sustainable situation where we have equal part pain for our governmental pleasures.

Negative Feedback Loop = Balanced = Stable
Substitute "taxes" for "energy prices."
For "slower growth," think "slower growth of government spending."

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