What’s the point of economic policy?

Posted on January 9, 2012 at 11:24 am,

This is the latest in our series of posts critiquing Wayne Grudem’s book Politics According to the Bible. Today we’re looking at the question of what the main aim of economic policy should be. Grudem doesn’t directly address this question, although it is clearly one of the most important questions to ask when deciding policy. There have been a variety of answers to this question over the years, but Grudem only addresses a few of them. Today we’ll look at two of these issues.

Economic Growth

Grudem believes that government should promote economic growth because is is something that promotes the general welfare of the nation, one of the aims of government. He rejects the idea that this approach constitutes materialism, because economic growth is something that is morally good. He cites Genesis 1:28, where God tells humanity to “subdue” the earth and “have dominion over” the life on it. He says that the hebrew word that translates as subdue means “to subdue, dominate, bring into servitude or bondage”, and that it implies that God wants us to “investigate, understand, use, and enjoy the resources of the earth”. He cites passages such as Deuteronomy 8:7-10, which promise material blessing (in terms of excess food) for those who follow God. Grudem also believes that passages like Galatians 2:10 and 1 John 3:17 – which remind us to help the poor imply that poverty is bad, and cites this as a reason for supporting economic growth.

Now, there is a caveat here – as Grudem notes, we cannot serve God and money (Matthew 6:24), but cautions that we shouldn’t think that material goods are evil in themselves. He says that the Bible never encourages people to seek to be poor, or to make others poor, but instead to seek to help and care for those who are poor. Grudem also says that there are also practical benefits to economic growth – a rich nation is better able to fulfil many of God’s other commands – mentioning raising children, caring for those in need, and building the church.

Now, Grudem is right that money and the things it can buy is not inherently evil, and that working to produce things is morally good. There are, however, some problems with his view. Firstly, this emphasis veers dangerously close to prosperity theology (God wants you to be rich and healthy) – which is almost certainly the most dangerous false teaching floating around Christianity (and particularly Western Christianity) today. Secondly, there is good reason to doubt that economic growth – in and of itself – will relieve poverty (an issue we’ll be covering that in the next two posts). Thirdly, there are cases in the Bible where God tells people to become poor. Jesus said precisely that to the rich young ruler in Luke 18:18-30 , following it up with a comment about camels going through the eye of a needle. No, it’s not a universal command – it was for a particular person – but it does show that poverty is not necessarily something for Christians to avoid. Fourthly, in a rich nation some of these other commands can be more difficult. Christianity in the Western world is, for the most part, dull and lethargic compared to Christianity in places like Latin America, Africa, China, or South Korea – nations which are nowhere near as rich as the West. In many senses, building the church is more difficult in a rich nation – overcoming the love of money that pervades a rich society is a big challenge.

Inflation

Grudem begins talking about inflation by using practical arguments that, whilst “the love of money is the root of all kinds of evils” (1 Timothy 6:10) money itself is a good thing. He says that money is a superior system to bartering, and that it is necessary because very few people are able to provide for themselves everything that they need in order to live. He says that the best way of providing a currency is for the government to do it – as this ensures that it is known, accepted, and has a standard value across a nation. He also says that, in order for the system to work, the value of a currency must remain stable over time. He cites examples of hyperinflation (when prices rise at a ridiculous rate – e.g. doubling every day) to show some of the problems increasing prices may cause – pointing out that, when this happens, the currency collapses as nobody uses it. He says that even at lower levels of inflation, it means that people are being robbed of their money. He then says that the cause of excessive inflation (note: this is the only time he suggests that inflation is sometimes acceptable) is always the printing of too much money, before spending a whole page lambasting the US government for bailing out the banking system in early 2009 because it would lead to increased inflation,

This view of inflation is, of course, somewhat simplistic. Other factors like supply and demand (especially for commodities like oil – the price of which affects almost every part of the economy) play a large part. And the actual effect of inflation can be very different across different social groups. In the UK, the current inflation rate on food, heating, and rent is higher than the official inflation rate, whilst the price of consumer goods has been dropping. This means that the poor suffer from a much higher inflation rate than the rich.

Also, in covering these two issues, Grudem neglects to mention that it is difficult for government to promote both low inflation and high economic growth. If the economy grows, then there is actually more money in the economy, and it becomes worth less – causing inflation. On the other hand, stepping in to prevent rising prices will inevitably deprive some sections of the economy from making more money.

Furthermore, Grudem’s criticisms of Obama’s attempts to deal with the recession, and save the banking sector from collapse, through increasing the theoretical money supply ignores the wider context. Yes, it may increase inflation (which, incidentally, will reduce the real-terms national debt – or at least the portion of it owed in the national currency) but saving the banks prevented the US economy from collapsing – remember, the vast majority of money exists in the form of numbers in a bank’s computer system, rather than in the form of coins and notes).

Finally, Grudem’s analysis ignores the fact that the vast majority of money created in the modern world is created by private banks, rather than by governments. The simplest way of explaining this is by looking at what happens when you put £1000 into a bank account. The banks are legally required to keep a small proportion of money in actual currency. For the purposes of this example, we’ll pretend that they have to keep 10% (the real figure varies from country to country, but is usually lower). Of your £1000, the bank has to keep £100, and can lend the rest out. When your neighbour borrows that £900, he puts it in a bank account (or spends it – and the shop puts it in their account). Either way, the new bank has £900, and has to keep £90. They lend the other £810 out, and the cycle continues until the banks have created several times more money than originally existed.

A note on government spending

In passing, Grudem describes US Government spending as “out of control”, despite the fact that the US has lower taxes and lower spending (relative to both the population and the size of the economy) than the vast majority of comparable countries. He cites one economist who appears to be blaming it on the Democrats, despite the fact that the current US debt and deficit was built up during the Bush administration.

3 Comments

  1. Posted January 9, 2012 at 3:21 pm | Permalink

    Thanks for these summaries – appreciated.

    Does Grudem justify the claim that (in your summary) “economic growth … is something that promotes the general welfare of the nation”? Or does he just assume it?

  2. Stephen Gray
    Posted January 9, 2012 at 6:51 pm | Permalink

    Hi Anthony,

    There are justifications scattered around, but they’re not put forward as a coherent argument. A basic summary of his case would be that economic growth means producing more and better goods, and that these are the benefit to society. I think he assumes that economic growth usually benefits every level of society, and he does suggest that a bigger economy makes the things I mention at the bottom of paragraph 3 a lot easier.

    I guess the problems with this position is that it ignores the questions of how the new wealth created by economic growth is distributed (I’ve got a post on the issue of economic equality coming on Friday), the fact that sometimes economic growth comes from industries that are not productive, and the fact that the Earth is a finite resource (though he argues that we won’t use up its resources in the chapter on the Environment).

    God Bless,

    Stephen

  3. Posted January 10, 2012 at 10:51 am | Permalink

    Thanks for that, Stephen. It’s a shame that Grudem seems to have swallowed that core belief of our age, that prosperity and monetary activity are basically synonymous. The arms trade springs to mind as a counter-example.

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