Wednesday, May 2, 2012

Does Government Spending Create Economic Growth?

The common mythology spread by politicians and their favorite economists is that government spending or "stimulus" somehow creates jobs above and beyond what the private sector would create on its own. In reality, what really happens with a "stimulus" is that phantom jobs are created-- those visible jobs contrived from the largess that result in corresponding invisible job losses elsewhere in the economy. A "stimulus" effectively diverts resources from productive uses to less productive uses-- i.e., money goes to those activities and constituencies favored by the current crop of politicians. Witness the most recent stimulus.

As Russ Roberts states:

The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated. The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper. And even the people who get the money often save more of it than they spend.


  1. Hey Biz,

    What do you think about the reduction of foreign treasury purchases?

  2. That is a virtual impossibility. Government can only procure funds by taxation, inflation (money-printing) or borrowing. None of those are *productive* activities. It's that simple.