The Practical Economist – Lesson 1
Does Government Spending Stimulate The Economy?
The short answer is no. Yet the idea that pumping money into the economy gets people spending and so boosts economic keeps getting restated as a fundamental fact, like the law of gravity.
But it’s not and never has been true.
Some government spending is required as overhead. Overhead being defined as that roof which keeps the rain off of the productive machinery and people beneath. And so we need laws both civil and criminal, we need a military to keep the barbarians at bay etc. But that’s about it and this legitimate overhead is so tiny a fraction GNP that we don’t have to consider it in normal discussion.
But everything else our government does, every “good idea” it has for spending money – social programs, crony industrial deals, subsidies, damages productive output. Every dime every time!
Because the government is not sending money in the direction market forces would have if the market had a choice, in other words in the most effective way. Consider the fact that the government has spent an amount equal to the national debt (16 trillion) on social programs since LBJ’s “War On Poverty.” Suppose that money was invested into productive businesses instead? Somewhere between forty and sixty million new jobs (productive jobs) would have been created, wiping out unemployment and as much as tripling our standard of living. But paying somebody not to work because they insist their back hurts, or subsidizing non-working non-productive single mothers or propping up some industry which would have otherwise died is not a productive use of money and as far as the economy goes, it’s not any different from throwing it down a rathole.
Look at Japan, sometime ago they decided to stimulate their economy with government spending . To the point where their national debt is now 200% of GNP. What happened? Their economy flat-lined. Just as ours has since LBJ. The same has happened in Europe – zero real growth.
It is true that people spending money can boost the economy, like after World War II. But only because people were spending their own money, making their own private free market decisions. Government spending (which was being cut at that time) had nothing to do with it.