Why Government Spending Does Not Stimulate Economic Growth

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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/SB1000142405274870348100457464655146928829...

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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

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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.

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Re: Why Government Spending Does Not Stimulate Economic ...
On Our Own wrote:

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.

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.

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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

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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.

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Re: Why Government Spending Does Not Stimulate Economic ...
DrKrbyLuv wrote:

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

+3.14159265358979323846264338327950288

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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

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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. www.aynrand.org www.atlassociety.com www.fff.org www.mises.com www.cafehayek.com 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 www.uncommonwisdomdaily.com by Sean Brodrick of $2450 along with a graph to show how silver's rise is accelerating. 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.

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!

 

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Re: Why Government Spending Does Not Stimulate Economic ...
A1B2C3D4 wrote:

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.

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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Re: Why Government Spending Does Not Stimulate Economic ...
guardia wrote:

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? :)

Sounds like indoctrination.

How about pay... pay works

Quote:

"Stimulus would be all right if we stopped paying those workers building unneeded homes, highways, gasoline cars and instead paid them develop wind farms, solar power, the smart grid, electrical cars and an efficient train network."

Provides the element of self direction that was lacking in the previous two attempts which frankly sounded Stalinist.

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Re: Why Government Spending Does Not Stimulate Economic ...
Gungnir wrote:

Provides the element of self direction that was lacking in the previous two attempts which frankly sounded Stalinist.

I think we're going around in circles here... You are assuming that people have a sense of "self-direction"... Do they? They are still paying other people to make gasoline cars, unneeded houses (through the government), highways and bridges that go to nowhere (especially true in Japan), empty cities (in China), etc...

You can't get around the fact that they need education. How would you put it then?

Samuel

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Re: Why Government Spending Does Not Stimulate Economic ...

Ayn Rand was a novelist and philosopher.  She was not an economist nor was she a sociologist.   Her essential ideas have been spread to apply to far more than she had originally stated.  And they're wrong.  Humans are not rational robots.  Humans are capable of great evil and great altruism.  Much of our social and economic philosophy for the last 30 years has been based on game theory, objectivism, and a perverse distortion of both when neither were meant to be applied to social engineering.

Much of our social philosophy has been based on the ideas of a paranoid schizophrenic and a novelist whose works came to the fore during a time when the US itself was extremely paranoid.  It assumes no altruism and that people will do what is rationally correct for themselves.  They don't.  And when they do they screw over the companies they are responsible for and the people who trusted them in order to do as Ayn Rand recommended and get what they want no matter the cost.  

It's time to let this go.  I know many of you will profoundly disagree with me and I respect your opinions,  but Ayn Rand, Milton Friedman, James Buchanan,  had their day,  and it brought us here.  It IS totalitarian only the rule is by the money not the law.

It is time to think of something new.

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Re: Why Government Spending Does Not Stimulate Economic ...
guardia wrote:
Gungnir wrote:

Provides the element of self direction that was lacking in the previous two attempts which frankly sounded Stalinist.

I think we're going around in circles here... You are assuming that people have a sense of "self-direction"... Do they? They are still paying other people to make gasoline cars, unneeded houses (through the government), highways and bridges that go to nowhere (especially true in Japan), empty cities (in China), etc...

You can't get around the fact that they need education. How would you put it then?

Samuel

I would put it that by your definition you are either an elitist since I assume you think you have self-direction which "people" don't. Or you have no self direction, in which case your arguments are all fluff, and this is pure mental masturbation. Which one is it...?

On Our Own wrote:

yn Rand was a novelist and philosopher.  She was not an economist nor was she a sociologist.   Her essential ideas have been spread to apply to far more than she had originally stated.  And they're wrong.  Humans are not rational robots.  Humans are capable of great evil and great altruism.  Much of our social and economic philosophy for the last 30 years has been based on game theory, objectivism, and a perverse distortion of both when neither were meant to be applied to social engineering.

Nor does Rand proclaim humans are rational robots, evil and altruism are in the eye of the beholder. What is altruism anyway but a means for the "guilty" to feel better about themselves? I don't believe in altruistic acts, since there's always a pay off for the altruist the truly altruistic will do something with no pay-off, however there's always the pay off about feeling better about yourself.

Similarly philosophies cannot by definition be defined as right and wrong, the same as an opinion, it is a statement of position, which inherently is scalar, by your definition I could argue that Christianity, Islam, Judaism, Hinduism, Freud, Aristotle, Nietzsche etc. etc. etc. is wrong. Rand's ideas actually do hold water on many fronts, to throw the wheat out with the chaff because of certain inaccurate assumptions is irrational in itself which Rand would describe as "evil" (which I always found quite a dichotomy, based on her philosophy).

I suspect that you're basing your theory of Rand's philosophy on a free market, and true capitalism which has never existed in our lifetimes, indeed many here at CM are arguing for a more representative randian economic model than we currently have, free markets, lower government interference, lower government spending (and thus taxation), return to non-fiat currency.

I also think you're giving too much credit to Rand, her philosophy has not gained as much of a foothold as you seem to think. nor do I think that Rands philosophies have been implemented has any bearing on the truth of what they said. Any more than the Catholic Church bears any relationship to the teachings of Jesus. I'm not sure how Rand fits with Friedman (other than Laissez-Faire ideas in his economics) or Buchanan, since Friedman was an economist (if you'd said Greenspan, then that would be understandable), and Buchanan is perhaps the worst president of all time.

By inference to your argument we should also tear up the constitution since it too has failed, and we should stop reading Jefferson, Madison, Franklin since their philosphies are wrong.

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Re: Why Government Spending Does Not Stimulate Economic ...
Gungnir wrote:

I would put it that by your definition you are either an elitist since I assume you think you have self-direction which "people" don't. Or you have no self direction, in which case your arguments are all fluff, and this is pure mental masturbation. Which one is it...?

I am sorry dude if I hurt you feelings, but that's off topic... I do consider myself part of the people, and I do not consider that I have "self-direction". (Edit: I'd rather believe that people as a whole have self-direction, not any particular individual.) That is why I would like to know your opinion. From the tone of your reply, I get that you feel that my argument about people lacking education is incorrect, so let's talk facts here. I would like an answer to the question: Why are people still paying other people for stuff that has no value?

Let's be constructive here shall we?

Samuel

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Re: Why Government Spending Does Not Stimulate Economic ...
Guardia wrote:

I do consider myself part of the people, and I do not consider that I have "self-direction". (Edit: I'd rather believe that people as a whole have self-direction, not any particular individual.) That is why I would like to know your opinion. From the tone of your reply, I get that you feel that my argument about people lacking education is incorrect, so let's talk facts here. I would like an answer to the question: Why are people still paying other people for stuff that has no value?

I don't know the answer, my answer was to get out of Dodge. I personally did not find that a lot of the stuff I had, held value so I divested to those who did, I left with no debt, and some property and capital; overall a better than zero sum game. You're part of the people, why do you pay other people for stuff that has no value?

I actually don't think it is off topic either, in many places people complain about the Government, Fed, NWO, etc. etc. etc. forcing people to do things that are counter to their best interests, however as you state the people have no self direction so what are the peoples best interests and how can we definitively say that these organizations are acting contrary to their best interests...? Maybe we shouldn't be looking for an answer, but a question. The only way we could get those people to identify their best interests is to get them to think about what they might be, and the way that you get people to think is to challenge them, in their beliefs and thought processes.

Unfortunately the only way you could educate the people to stop buying stuff that the don't need is the same way you get people to buy stuff they don't need, by huge advertizing and marketing campaigns, which is a form of indoctrination, some of the most vicious psychology known to man is used in advertizing. Of course since you've admitted you have no self-direction how can we trust the direction you've set, of stopping construction of houses, gas powered vehicles, roads, bridges and cities? Have you been convinced of peak oil, because you believe it, or because a number of people here do? If you believe it because you've been convinced by the evidence, then you have a degree of self direction, if your convinced by weight of numbers of other believers you don't. If 50,000 people all say the same stupid thing, it's still a stupid thing.

More importantly, how can we be sure that the direction that the "education" takes is in the best interests of those who need it, how do we define those that need it, or that the education is welcomed. Unwelcome education is not education but indoctrination, and by defining a group that needs this education that in itself is an elitist assumption, maybe those demanding that others be educated are really the ones that need re-educating. It's not that simple unfortunately, I'd bet Dollars to buttons that Hitler, Mussolini, Lenin, Stalin, and Mao did not set off with the express intent of creating the systems that they did, but it happened all the same, I'm sure they were party to it, but they had the best interests of others at heart even if only in the beginning (that's not to say that they didn't have what they considered the best interests of others at the end either). So we should be ever mindful that a "simple" answer to a seeming problem may lead to worse problems further down the line.

Now on real topic, the answer to why Government spending does not stimulate economic growth is simple, in a fiat system currency is created to fund economic growth, which leads to increased inflation and interest which results in devaluation in real terms of currency and leading to a lower standard of living. In non-fiat systems the sole way that a government can raise money to spend is by taxation which reduces net income therefore reducing internal markets and a lower standard of living. Why did we need a report from the Wall Street Journal to tell us this...? I thought it was pretty obvious; but that's not to say that Investorzzo shouldn't have posted it.

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Re: Why Government Spending Does Not Stimulate Economic ...

Yes, things are not simple at all, I realize that. I make simple statements, but they carry a lot of assumptions in the background. When I mention "education", I usually mean the "perfect" kind of education that would solve all problems, if only we knew what the hell that was, but I agree we don't.

As for peak oil, and the rest. Well, I grew up with parents that had these kind of values. They aren't technically driven, but they value saving money and energy, eating well, growing vegetables, living the country and become as selfsufficient as possible. They are aware of things like peak oil, but they are not the kind of person that try to figure out when everything is going to blow up. I was always split between these values and what the rest of society had to offer me. On one side, there was what I knew was right, like a gut feeling, might well be genetic, but on the other side their was society doing things that didn't make sense to me, but that was all there was, so I tried to adapt as best I could (not). My parents are not technical as I said... but I am the technical kind of guy, engineer actually. I realized last year with my research that I did that peak oil is pretty much here, and even harder to believe that we have no alternative energy sources! But in my eyes, it became so obvious! And this site, wow, I mean, reasonable people.. I never thought there would actually be a community of reasonable people on this planet. That blew it off. Screw society, never accepted me in the first place!

Don't know that I can trust yet what I am doing now knowing what I did (not do) before.. there was a long thread about "demoronification" a few weeks ago. I could identify to some of the concerns expressed there

You know, about solutions and stuff, the more I think about it, the more it seems to me that humans can't handle huge societies. It might well be that anything beyond a few thousand individuals is in fact intractable... That might make a good PhD thesis (if one cares for academia :)

Samuel

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Re: Why Government Spending Does Not Stimulate Economic ...

James Buchanan was an economist.

 

http://www.dallasfed.org/research/ei/ei0302.html

 

At first glance, public choice theory seems to be nothing more than common sense: Governments are collections of individuals whose interaction is determined by the same self-interest that motivates people in the private sector. The simple view that government is a collective decision-making process that altruistically solves social problems has a long and, according to Buchanan, romantic tradition both in political theory and in economics. Because of his thorough, individualistic approach to government and his adherence to subjective- cost doctrine,[7] his public finance models lie outside the neoclassical mainstream belief in the collective problem-solving model and in measurable, explicit opportunity costs. A pure subjective-cost approach denies that the actual costs of any action can ever be known, even by the decisionmaker(s), because the act of choice is itself cost, subjectively perceived. A theorist adhering to this doctrine would not carry out any benefit–cost analysis, as costs are inherently not observable and, therefore, not measurable.

Although the economics profession has resisted Buchanan’s arguments, public choice theory has, nonetheless, found its way into public finance discussions and has had a strong influence on government policies. As many economists came to doubt the efficacy of large, state-funded programs, they saw public choice theory as a way to examine what has come to be known as government failure. For decades following Arthur Cecil Pigou’s famous book The Economics of Welfare, economists saw government as a disinterested agency that could correct for market failures. Buchanan and other public choice theorists altered the debate by proposing that government may not really correct problems in the marketplace because of the wealth trading, or rent seeking.

 

There was a confluence of people who believed so strongly in the idea of the free market that they would sacrifice all in its favor.  They merged with people who viewed human behavior as very simplistic - solely driven by self-interest.   This is very much an over simplification of the drive of human behavior.  Does a soldier throw himself on a hand grenade to save his fellows so that he'll feel better about himself?  It is counter to most of these arguments to give your life for someone else,  yet humans do it.  We do insane things that are counter-productive and self destructive in pursuit of pleasure or love.  Rand was influential in encouraging the general public to accept this view of themselves.  Nash (the schizophrenic) posited game theory which was meant for application in war and was then applied to everything from government to marriage - mostly disastrously.  He admitted later in life that his idea was probably flawed.  Friedman was the economic advisor to Reagan and heavily influenced almost all of the generation of MBAs who followed by teaching that businesses had no right doing anything other than seeking profit.  

The combination stripped the business class of any belief in any sense of responsibility to others or even to long term thinking.  It encouraged vast amounts of corruption in high end business and politics.  Thinking on this scale doesn't change due to one person,  it comes form a confluence of thinkers.

The revolution and the constitution would not have come about if there had not been a series of influential people who led the way.  I believe people should study the past so as not to replicate it.  These ideas led us to where we are.  If we do not like where we are we need new ideas.

 

 

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Re: Why Government Spending Does Not Stimulate Economic ...

Govt spending on research and development within the military industrial complex, stimulates the economy, at times.  A rudimentary form of the internet was originally developed for military use....I think. Ironic how something developed for the war machine, could undermine the war machine. LSD, same.

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Re: Why Government Spending Does Not Stimulate Economic ...
A1B2C3D4 wrote:

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

I watched the Crash course on YouTube and left comment on most every chapter. I had to come here and register to see if Chris had any mention of the Ultimate Solution. Of this whole website I find only your comment. As I said in a few of my comments at YouTube, the Ultimate Solution is so obvious yet hidden in plain sight that most people don't know it when they see it. They don't stop to think about the reality of it. How it is played out in everyday life. How, when and where The Problem exists. And that the Ultimate Solution is the only path to world peace, health, wealth and prosperity for all people.

Here's a hint. Regard each and every act of initiation of force as though it was happening to you personnally or a loved one. Becasue in reality, it is happening to someone and their loved one. Denounce initation of force, threat of force and fraud at every instance it occurs.

Government by the consent of the governed means it needs your consent to tax you. Otherwise it is slavery. If you are coerced to pay taxes you are in involuntary servitude. Stand up for justice with your fellow man whom conducts his life without iniating force fraud and coercion. For you and he are right and just, and they are wrong and unjust.

Your tax dollars are used to further enslave you. The alphabet agencies enslave Americans at every turn. The money the government borrows based on the full faith and credit of the UNITED STATES Inc. is that you and every American is a creditor to the US, not a debtor. It is not your national debt. It is UNITED STATES corporation's debt. US Inc. owes you bigtime.

There's so much more I could write to succinctly bring the Ultimate Solution home to roost. I conserve my time an energy for a larger viral audiance.

Fighting for peace is like screwing for virginity.

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Re: Why Government Spending Does Not Stimulate Economic ...

Value of Infrastructure / Cost of Government = % of potential Job Growth

Not much more needs to be said here.

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Re: Why Government Spending Does Not Stimulate Economic ...

 

Could net gain in overall employment tell us anything?

 

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