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Why Government Spending Does Not Stimulate Economic Growth

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  • Wed, Jan 13, 2010 - 02:56am

    #1

    investorzzo

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    Why Government Spending Does Not Stimulate Economic Growth

Great article taking on the debate about govenment stimulus and whether there is any real benefit. I always thought it might be useful, until I read this article. Jon

Why Government Spending Does Not End Recessions

Moving forward, the important question is why government spending fails to end recessions. Spending-stimulus advocates claim that Congress can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.[7]

Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.

For example, many lawmakers claim that every $1 billion in highway stimulus can create 47,576 new construction jobs. But Congress must first borrow that $1 billion from the private economy, which will then lose at least as many jobs.[8] Highway spending simply transfers jobs and income from one part of the economy to another. As Heritage Foundation economist Ronald Utt has explained, “The only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven.”[9] This statement has been confirmed by the Department of Transportation[10] and the General Accounting Office (since renamed the Government Accountability Office),[11] yet lawmakers continue to base policy on this economic fallacy.

Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level. Similarly, taking dollars from one part of the economy and distributing it to another part of the economy will not expand the economy.

http://online.wsj.com/article/SB10001424052748703481004574646551469288292.html?mod=WSJ_latestheadlines

  • Wed, Jan 13, 2010 - 08:40am

    #2
    Peak Prosperity Admin

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    Re: Why Government Spending Does Not Stimulate Economic …

Stimulus would be all right if we took all those workers building unneeded homes, highways, gasoline cars and instead made them develop wind farms, solar power, the smart grid, electrical cars and an efficient train network. This way, people would still be able to move around and have energy in a few years… This would “stimulate” the economy in the sense that we would have at least something down the road that we could call an “economy”

Samuel

  • Wed, Jan 13, 2010 - 11:57am

    #3
    Peak Prosperity Admin

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    Re: Why Government Spending Does Not Stimulate Economic …

Taking water from one end of the pool and moving it to the other does not raise the overall water level of the pool,  but if done properly, it can get the water moving.  And if your power supply requires that the water be moving in order to operate you are still making progress at fixing your problem.   Once the water starts moving enough it can pull in water from other sources,  but a stagnant pool is simply that – stagnant.

  • Wed, Jan 13, 2010 - 06:06pm

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    Re: Why Government Spending Does Not Stimulate Economic …

[quote=On Our Own]

Taking water from one end of the pool and moving it to the other does not raise the overall water level of the pool,  but if done properly, it can get the water moving.  And if your power supply requires that the water be moving in order to operate you are still making progress at fixing your problem.   Once the water starts moving enough it can pull in water from other sources,  but a stagnant pool is simply that – stagnant.

[/quote]

It can certainly get the water moving but it is not quite as benign as you imply.  What would happen if the part of the pool that is having its water removed could react to it?  The government can always tax (or take from) the rich and give to the poor, while skimming a little to feed the bureaucracy, but this is not frictionless and often has unintended consequences.  It can also create inflation which, forces savers and those on fixed incomes, into the risk taking world so as not to see their savings be eroaded.

These actions can certainly cause some changes in economic activity but just because it can be done, does not make it right.

  • Wed, Jan 13, 2010 - 07:39pm

    #5
    Peak Prosperity Admin

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    Re: Why Government Spending Does Not Stimulate Economic …

Hello investorzzo!

It is great to see you back…your posts were missed.

If ya don’t mind, I want to rephrase your topic –

Why Government Borrowing Does Not Simulate Economic Growth

Our problem is that we are drowning in debt.  End the Fed, take back the control and issuance of our money.  Why do we borrow from the international banking cartel when we have the power to issue our own money free from debt?

Larry

  • Wed, Jan 13, 2010 - 08:05pm

    #6
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    Re: Why Government Spending Does Not Stimulate Economic …

 

Taking water from one end of the pool and moving it to the other does not raise the overall water level of the pool,  but if done properly, it can get the water moving.  And if your power supply requires that the water be moving in order to operate you are still making progress at fixing your problem.   Once the water starts moving enough it can pull in water from other sources,  but a stagnant pool is simply that – stagnant.

But that’s the objective, to raise the level of the pool, i.e. economic growth. The objective isn’t to get water moving. There is no benefit  to just move water around. If as you say “your power supply requires water be moving in order to operate” and the effort required to move water from one side of the pool to the other (stimulus) is greater than the return of “power” (growth-that’s what they’re trying to stimulate), then they’ve gained nothing at best and probably lost resources in the process. When you consider that the “water” is taxpayer money and the folks doin’ the moving are politicians, there’s no way this could be a good thing.

  • Wed, Jan 13, 2010 - 11:23pm

    #7
    Peak Prosperity Admin

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    Re: Why Government Spending Does Not Stimulate Economic …

[quote=DrKrbyLuv]

Hello investorzzo!

It is great to see you back…your posts were missed.

If ya don’t mind, I want to rephrase your topic –

Why Government Borrowing Does Not Simulate Economic Growth

Our problem is that we are drowning in debt.  End the Fed, take back the control and issuance of our money.  Why do we borrow from the international banking cartel when we have the power to issue our own money free from debt?

Larry

[/quote]

+3.14159265358979323846264338327950288

  • Thu, Jan 14, 2010 - 12:20am

    #8
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    Re: Why Government Spending Does Not Stimulate Economic …

 

The U.S. Needs to MAKE things again.  Stop sending manufacturing jobs overseas.  The argument is that whatever Manufacturing jobs leave will be made up in the “Service Sector”  again more BS, the service sector jobs are banking and real estate, both have taken an axe to the head and both produce a “NOTHING” thing (loans). 

Stimulus could happen if the government took the 3 trillion used in the WAR, and put 1 trillion toward Solar and Wind, and the other in Bio and nano technologies.  Let’s make things the Rest of the world Wants with those 3 trillion, and not use it to BLOW up the world and piss everyone off. Laughing

  • Thu, Jan 14, 2010 - 02:46am

    #9
    Peak Prosperity Admin

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    Re: Why Government Spending Does Not Stimulate Economic …

I would encourage everyone to be more sensitive to the fact that we should never give our moral consent to the initiation of force. 

Read the first sentence in Samuel’s post: “Stimulus would be all right if we took all those workers building unneeded homes, highways, gasoline cars and instead made them develop wind farms, solar power, the smart grid, electrical cars and an efficient train network.”

Focus on the words “if we took all those workers” and “instead made them” and you will begin to see what I mean. Workers are not ours to take nor do we have the right ourselves as individuals to make them do anything.

The premise underlying virtually all government programs is the idea that it is justifiable to coerce, mandate, require either ordinary citizens, small businesses, corporations and even States to do something to fulfill some goal of the politicians who have acquired the unconstitutional power to enslave.

This will continue to get worse until the society becomes a totalitarian dictatorship as those premises are fully implemented. Or we will wise up and realize that they only get away with it because most of us who elect them into office with the power to do those immoral acts  implicitly grant them the moral sanction to do so.

Ayn Rand dramatized these ideas in her novel Atlas Shrugged and more explicitly in her journal The Objectivist Newsletter and her collections entitled The Virtue Of Selfishness and Capitalism: The Unknown Ideal. http://www.aynrand.org http://www.atlassociety.com http://www.fff.org http://www.mises.com http://www.cafehayek.com http://www.lfb.org

What was also lacking in the article atop this thread was that in addition to taxing or borrowing the Fed also provides additional paper currency in an obfuscated fashion calculated to be mysterious and seemingly above the heads or beyond the comprehension of the man in the street.  

Incidentally I just came across a projection for the price of silver at http://www.uncommonwisdomdaily.com by Sean Brodrick of $2450 along with a graph to show how silver’s rise is accelerating. http://www.investmentrarities.com also anticipates a rise in the price of silver because of both industrial demand, worldwide, exhaustion of silver reserves which have been drawn down to fill the gap between yearly production from the mines and demand over many years, and a presumed existence of a huge naked short silver futures position by JP Morgan and a few other large entities.

If you are only interested in saving yourself buy silver and gold. If you want to help to understand just how come the world is drifting toward tyranny read Atlas Shrugged.

http://www.campaignforliberty.com 296,000 who want to replace the politicians who ignore the Founder’s limits on Congressional power in Article 1 Section 8,9 and 10, with those who will abide by those limits.

But that is just me!

 

  • Thu, Jan 14, 2010 - 06:36am

    #10
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    Re: Why Government Spending Does Not Stimulate Economic …

[quote=A1B2C3D4]

Read the first sentence in Samuel’s post: “Stimulus would be all right if we took all those workers building unneeded homes, highways, gasoline cars and instead made them develop wind farms, solar power, the smart grid, electrical cars and an efficient train network.”

Focus on the words “if we took all those workers” and “instead made them” and you will begin to see what I mean. Workers are not ours to take nor do we have the right ourselves as individuals to make them do anything.

The premise underlying virtually all government programs is the idea that it is justifiable to coerce, mandate, require either ordinary citizens, small businesses, corporations and even States to do something to fulfill some goal of the politicians who have acquired the unconstitutional power to enslave.

[/quote]

Yeah, ok, sorry about that… A better way of saying this would be: “if we could educate all those workers” and “instead make them understand the important of developing”

Sounds better? 🙂

Samuel

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