Government Spending

Many Politicians Claim That Increased Spending Sparks Economic Growth. Here's Why That's Misleading.

A new study finds that as the government expands, the private sector shrinks.


The scale and scope of government spending expansion in the last year are unprecedented. Because Uncle Sam doesn't have the money, lots of it went on the government's credit card. The deficit and debt skyrocketed. But this is only the beginning. The Biden administration recently proposed a $6 trillion budget for fiscal 2022, two-thirds of which would be borrowed.

Obviously, the politicians pushing money out always make extravagant promises about the economic growth that will result from their generous use of other people's money. A new study by George Mason University economist Garett Jones and myself dispels some of the magical thinking that goes on in this area.

In our paper published by the Mercatus Center at George Mason University, we review the most recent literature on the short-term effects of government spending, including recent findings on what economists call the "multiplier."

The multiplier looks at the return we get in economic output when the government spends a dollar by directly hiring federal employees, paying contractors for public projects, and so forth. If the multiplier is above one, it means that government spending draws in the private sector and generates more private consumer spending, private investment, and exports to foreign countries. If the multiplier is below one, the government spending crowds out the private sector, hence reducing it all.

Economic textbooks traditionally claim that the government multiplier is high. In other words, they say that spending not only pays for itself but generates large increases in economic output. In recent years, Keynesian-leaning economists have had more modest expectations and have theorized a multiplier around 1.5 or two. However, reality is often different than theory.

The evidence presented in our paper suggests that government purchases probably reduce the size of the private sector as they increase the size of the government sector. On net, incomes grow, but privately produced incomes shrink.

According to the best available evidence, we find that "there are no realistic scenarios where the short-term benefit of stimulus is so large that the government spending pays for itself. In fact, even when government spending crowds in some private-sector activity, the positive impact is small, and much smaller than economic textbooks suggest." If you understand how legislators make their decisions to spend money, based on politics rather than sound policy or economics, that finding shouldn't surprise you.

We also find that the only case where the literature finds a multiplier above one requires some very specific conditions, such as a zero lower-bound interest rate. And even in that case, the multiplier is 1.4 at best. Arguably, we have those conditions today. That said, our colleague Scott Sumner offers a compelling argument that "this finding…is conditional on having an incompetent or passive monetary policy in place; that is, having a monetary policy not designed to hit a growth target in aggregate demand."

A competent Federal Reserve would set its policy to achieve optimal growth of expected aggregate demand and attempt to neutralize the impact of fiscal stimulus through policies like quantitative easing. As for what it means today, if you think that the current monetary policy of the Federal Reserve is reasonably competent, then you actually shouldn't expect the fiscal boost from all that spending to be large. In fact, it could be close to zero.

This is, of course, all before taking future taxes into account. When economists like Robert Barro and Charles Redlick have looked that the multiplier, they've found that once you account for the future taxes that will be required to pay for all that spending, the multiplier could be negative.

Finally, the COVID-19 recession was better described as a bad supply shock, where the pandemic unexpectedly affected the supply of goods and services, relative to demand. These poor conditions make a multiplier above one unlikely. Under circumstances where economies were closed by government officials and consumers were staying at home to mitigate the effects of COVID, government spending could not have stimulated the economy. As such, the hundreds of newspaper reports about COVID relief that called the spending "stimulus" were misleading.

On the flip side, reporters today should also be careful not to assume that government spending deserves all the credit for economic growth this year, since much of it will be the normal effect of the broad economy reopening. Many economists are worried that the extravagance of government spending may seriously backfire and lead to inflation.


NEXT: Biden Administration To Donate 500 Million Doses of Pfizer-BioNtech Covid-19 Vaccine to Poor Countries

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108 responses to “Many Politicians Claim That Increased Spending Sparks Economic Growth. Here's Why That's Misleading.

  1. Many politicians have the economic sense of a drunk guy in a strip joint.

    1. Except the ATM isn’t printing me new money once I’ve hit my limit. And Cherry Poppins isn’t going to do that thing with the umbrella for an IOU.

      1. Yup. The only reason California hasn’t slid off into the Pacific is because states are not allowed to print their own money like Trump and Biden can do. And some propositions prevents tax increases without voter approval.

        Howard Jarvis is a fucking hero and angels guard his tombstone in Forest Lawn.

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      2. But politicians don’t know that, they think it will happen eventually, especially the Cherry Poppins part.

        1. “Eventually” to a politician is no further off than the next election.

    2. Politician: ” We had to do something, that was something, therefore we had to do it.”

    3. They have the same goals, buy friends for a short term benefit that they’d never get relying on their inherent attributes.

    4. That’s an insult to us drunk guys at strip joints.

    5. If only it was that good.

  2. Ok, where’s the damn brickbat?

    1. Only if the drunk guy is Hunter Biden.

  3. More of the cargo cult mentality. Money does not equal wealth, money is a means of exchanging wealth. Government can pump out all the money it likes but if nobody is producing the things people want to buy, what good does it do? At the extreme, we could all be receiving a million dollars a month and we’d all be rich and nobody would have to work for a living, right? But if nobody’s working, what will we be buying?

    1. Well, the pols will be buying votes! At least for the short term. Then the voters will demand a Leader to get them out of the economic chaos.

    2. The lesson to which you refer, I learned as a kid by reading a comic book story titled “A Financial Fable” starring Scrooge McDuck.

      It’s still a good entertaining read. They of course, don’t teach this lesson in government schools – it goes against the idea government can take care of you, which is really the idea you’re a slave to government and they’ll make decisions about who does what work and how what is produced and collected is distributed among the people, with the people in government getting the better stuff and more of it.

    3. POINT!!!

      Economics and multiplication are not about just shoveling money around, its about creating finished goods from raw materials.

      Govt services are not econ activity.

      Broken Window Fallacy

    4. Well, if the reason that people have stopped producing is due to a sudden drop in the money supply (leading clearing prices to broadly drop faster than many nominal prices can adjust, leading to broad revenue/outlay contract mismatches, leading to shuttering bankruptcies), then a sufficient injection (spending) of new money into the economy as that occurs should help mitigate that production drop.

      But, that scenario is a negative demand shock. And as the author points out, the COVID recession was instead a negative supply shock. Further, the Fed Reserve was already treating it as a demand shock with massive *monetary* stimulus. Further, even knowing this would help, rarely leads to well-timed government action. And even further, when the stimulus is fiscal rather than monetary (which can theoretically expand and contract, maintaining a constant price level), it doesn’t account for future taxes.

      So then, what you say is true–government spending merely changes (at a cost) who controls existing resources, not how many resources exist.

  4. However, reality is often different than theory.

    “In theory, theory and practice are the same. In practice, they are not.”

  5. But I would be a millionaire. In US dollars.

    1. As a kid I dreamed of being a millionaire. My dad and I even calculated what it would mean. Without ever touching the principle, one million dollars would let a person live off the interest in great comfort. (It was his lesson to teach me to save, I guess).

      Now… I am a millionaire in terms of savings and investments. And I worry I still won’t be able to retire in ten years. And I worry the government, both state and federal, will still find some way to confiscate it to fund their crazy schemes. It actually keeps me up some nights. You turkeys think socialism is just some cultural thing about having to respect gays or wearing masks, but socialism means they get to take my savings.

      1. The Federal wealth tax is coming. Start thinking about what you will liquidate to pay your taxes each year (until you are poor enough to not have to pay taxes).

        1. It’ll never happen. Too complicated to enforce…

          1. Apparently not for state and county governments.

            1. The problem is that avwealth tax at the federal level is unconstitutional. The original Constitution provided for appirtioned taxes. That meant that income taxes were unconstitutional, until the 16th Amdt was enacted a little over a century ago.

              The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

              1. And that isn’t going to happen any time soon. The people that a wealth tax would hit the hardest, are the same people who own the bulk of Congress. Moreover, with the current level of ill repute for the IRS, the chances of enacting an amendment allowing for a wealth tax is negligible.

  6. “A new study finds that as the government expands, the private sector shrinks.”

    The democrats have know this all along. Feature, not bug.

  7. Call it what it is – Democrats pretending to spend money to grow the economy, by spending money they don’t have, knowing for a certainty that they are in reality hurting the economy by doing such.

    It isn’t, of course, under just Biden, but whenever, it seems, they get control over both elected branches of the government. They did this under LBJ. They did it under Obama. And they are doing this under Biden. Each time, it fails, because it has to fail. The government cannot spend money more efficiently than the private sector does, because of its central control. Twelve years ago Speaker Pelosi was talking about a multiplier of 4 or 5. How was she going to get there? Cash for Clunkers, the Train from Nowhere to Nowhere, etc. hundreds of billions, if not more, flushed down the toilet, benefitting mostly major Dem politicians and their families and cronies, while miring us in the eight year Obama Recession, the worst economic recovery since FDR had tried to spend his way out of the Great Depression throughout most of the 1930s. How can crushing perfectly good cars and trucks help the economy reach her 4-5x multiplier? It can’t, and didn’t.

    1. “The government cannot spend money more efficiently than the private sector does,”
      Progs will argue that the private sector is neglecting the highways, bridges, tunnels, airports, schools and low cost housing because there is no profit in it, the government has “traditionally” done these things and they only way to have these nice things is to push private sector spending aside.

      1. The very root of the problem ….

        “Because there is no profit in it” — keyword VALUE.

        Pretending that laziness and incompetence will pay-off. It’s a battle with accepting natures order of law for ‘Progs’ (i.e. ***Reality***). Natural facts are that worthless is worthless and dinner, TV and shelter doesn’t fall from the sky from compulsive laziness and incompetence. And Mary Poppins and a magic wand doesn’t make highways, bridges, tunnels, airports and schools.

        At the heart of it is unprecedented GREED and self-entitlement and it’s Nazi “plan” is executed by the point of Gov-Guns on ‘those’ people.

        There’s no such thing as a *free* lunch.

        1. Or to summarize; It’s the mentality of conquer and consume – a human trait that has led to the worse curses and evils of the world.

      2. Sure. The private sector doesn’t do maintaining roads very well. They do build new highways just fine (e.g. Colorado’s E470 eastern half of its beltway around Denver). But what it doesn’t do is build slow high speed trains from nowhere to nowhere in CA just fine. It will very likely never be very useful to the average Californian, because it will probably never get near either downtown LA or SFC. Of course, despite the hype, the real purpose of that project is enriching the families and cronies of powerful politicians, and for that purpose, it works quite well.

        Anytime Democrats and other leftists try to use this argument, that the private sector doesn’t do infrastructure very well, look at the pending Christmas tree Infrastructure Bills in Congress right now. Relatively speaking, there is almost no money allocated for fixing roads and highways, while last I heard, there was even money allocated for filling them in. Far more money is allocated for passenger trains, and esp “high speed” passenger trains. Plenty of money for bailing out Blue State pension plans (not coincidentally the states represented by the Congressional leaders putting the legislation together). Of course, plenty of money again for solar and wind energy, but much less for transmission lines, and none for pipelines for natural gas for running power plants to cover the times when the sun isn’t shining or the wind isn’t blowing.

        Even when Congress tries to pretend to be doing infrastructure, they can’t. The opportunities for graft are just too huge to resist. We are talking maybe $2 Trillion, maybe more, with almost none of it going to necessary infrastructure, like fixing roads and highways, long distance electric transmission, oil and gas pipelines, etc, and most going to projects likely to do more harm to the economy, than good.

        1. There is a far amount of money allocated in those infrastructure bills for passenger rail. Who in this country actually wants to ride trains across the country? People living in the Acela Corridor in a handful of tiny states between DC through NYC, and up to Boston. And, of course, the politicians, families, and cronies who would personally benefit financially. Railroad passenger travel is just not very attractive to a significant majority in this country. It isn’t that fast, isn’t that comfortable, costs way too much, and lacks flexibility. The Acela Corridor covers the tiniest states in the Union. Most of them together would easily fit in many of the western states.

          To make passenger rail travel realistic, the populace needs to be crammed into very densely populated urban environments- that turned out to be death traps when the COVID-19 pandemic hit. Humans didn’t evolve to live comfortably in such densely populated environments. They are unhealthier and far more violent than the rest of the country – with humans arguably acting similar to rats when packed too closely together. The majority in this country greatly prefers to live less densely, to raise their kids in single family houses in suburbia, or even in rural parts of this country (like here in SW MT).

          Why the incessant push by Dem politicians, etc, to cram us together in these unhealthy urban environments? My guess, for power. Easier to control the masses, when the masses are more densely packed together, and more interdependent.

          In any case, getting back to my original point, when politicians make economic decisions, those economic decisions are inevitably political. And now with our politicization, highly political, with one party, with a very likely fraudulently acquired, bare ruling majority, making a massive wealth grab, while they still can. Even if politicians would try to make economic allocations as well as the private sector can, they can’t, due to their centralized control. But they don’t really try any more. And that means a multiplier well below one.

          1. I looked up the Acela schedules and rates. Boston South station to Washington Union station is 7 hours each way, give or take a few minutes. The trainset is capable of at least 150mph, but 16 stops (an average of 30 miles apart), bad track, and shared track hold the average speed to 65mph. The only 1-day Acela round trip starting in Boston (excluding red-eye schedules, which put you into a second day) is #2155 7:15AM-2:01PM south and #2170 2:50-9:45pm – if all goes well, you might be able to have a 30 minute meeting in the station. I think that by airline you could do a one day turnaround with several hours at the destination – even counting TSA lines and the horrible traffic at both airports. By Amtrak, you’re going to need a hotel room, or take a red-eye train and nearly a day and a half, and try to sleep sitting up.

            OTOH, cost and comfort is fairly good. Acela is only business and first class, and business class no refunds costs $89 * 2. Cattle-car class on a discount airline might cost less than this, but I think any business class airline ticket costs much more. But you’ll be “enjoying” the train trip for much longer, and if Acela requires a hotel room and the trip by airline doesn’t, the cost comparison is not so good.

            And this is Amtrak’s best train, on the best of very few routes where Amtrak owns most of the track. Outside the Northeast corridor, Amtrak is competitive only for passengers who don’t mind delays and want a land equivalent of a cruise ship. Judging by the only non-commuter train I’ve been on in 6 decades, the Empire Builder Chicago-Seattle, it only half-way provides this experience even if you manage to reserve one of the few sleeping cabins. (Otherwise you’re sitting up for about 4 days.)

      3. What you refer to is a tiny token of government spending, but the excuse for all of it.

    2. Spending money they don’t have. How is this different than under Trump?

      Changing the team color is not the solution. Cut the fucking spending!

      1. “…How is this different than under Trump?..”

        Order of magnitude, TDS-addled shit.

        1. +100000 perfectly simplified…

      2. Oh; How about 13% (Since Democrats wrote 87% of the Cares Act) and $8-Trillion Dollars? Sure; the RINO’S make some real whopper mistakes but in the choice of 13% and 87% who in their right-mind is going to choose ‘worse’.

        Perhaps if another civil war breaks out and the ‘Slavers’ loose it again then the USA will be restored with more purity; but myself still thinks there is hope so long as the ‘Slavers’ loose their Nazi-Indoctrination camps and People start thinking with their Head instead of their Greedy emotions.

        1. “…who in their right-mind is going to choose ‘worse’.”

          TDS-addled assholes like Brandy, trying to justify their adolescent ‘fan-boi’ approach to politics, cannot be confused with someone in their ‘right mind’.

    3. I don’t think most politicians, Dim or Pube, know this.

  8. People talk about a multiplier for government spending, but they never talk about a multiplier for private spending or private investment. Makes no sense.

    1. It’s especially nonsensic when you consider that in figuring the government’s spending multiplier, they count all the downstream private spending.

      But whole concept is silly anyway when you realize it’s counting only the money, and all of the money, in an exchange. There is gain of value in voluntary trade, but it’s only a fraction of the money amount.

  9. Say it with me everyone: QUADRILLION

    1. Too close to QAnon – – – – – – – –

      1. It must be nice to believe that there is a vast conspiracy going on; that, nefarious as they may be, someone is in control. My eyes have been opened though, and the truth is more terrible than any conspiracy: No one’s in control. What you are watching is the rational actions of rational actors operating under normal parameters. This is the predictable result of democracy. It failed for the ancient greeks and it will fail on us for the same reasons.

  10. The most important paragraph in this article, is the one showing that the costs of stimulus aren’t taken into account when evaluating the value of the multiplier. That is the disclaimer that all reporters and economists need to state when making claims of government spending stimulating the economy.

    I appreciate one thing Trump did. Since all the RINOs and Democrats spout this nonsense about government spending making us prosperous, Trump did an end run around their usual game of spending to generate campaign cash from the rich guys getting the big contracting checks, by forcing them to send it directly to people or else explain why it doesn’t make us prosperous. Pelosi had a fit, claiming “we don’t know where it will be spent”, and blocked legislation for such payments to individuals. Now the big spenders have to explain why they aren’t sending it directly to the people.

    One piece of analysis/thought missing from this article, is it focuses on the kind of government spending that can increase economic production such as true infrastructure (which should be a locally funded thing, not federal). And doesn’t distinguish between that and other spending (redistribution, military, crime) that only consumes our wealth.

    1. I think that you should clarify that it isn’t just infrastructure, but actually useful infrastructure. All the passenger rail funding proposed is infrastructure, most of it just isn’t economically useful infrastructure. It’s primary purpose is as a vehicle for graft, and secondarily to push more and more of the population, unhappily, into more densely packed urban environments.

    2. To the extent infrastructure has been neglected, it is local and political. Local politicians only want to build new, rarely repair old.

      Federal infrastructure is usually awash in cash.

      1. For example, Grand Rapids, Michigan added a surcharge to their income tax for the 2008 recession (which started in 2007 for Michigan only). That and federal funds paid for a few of the long-overdue pothole repairs, and I don’t know what they did with the rest of the money. After the “emergency”, our Democrat-leftist city council wanted to continue the surcharge for road repairs. They needed a referendum for this tax increase, but if you read the fine print, only 40% went to roads. And even that was under the control of a committee of anti-automobile doctrinaires, so if the voters had been fool enough to pass it, I imagine that it would have paid for painting lots of bike lanes (not only in a city where you get snow and freezing rain 6 months a year, but also regardless of whether the pavement was ride-able), narrowed driving lanes, trees planted in the middle of downtown streets, and parking spaces removed.

  11. Nah Yellen says higher interest rates and inflation are good for us. She couldn’t be wrong now, could she?

    1. Every bit as reliable as Fauci.

  12. Economic activity is NOT the same as economic growth. A whole bunch of activity just before April 15th every year, but that doesn’t mean May is a boom month.

  13. We are now around $30 Trillion in debt. If all that borrowed spending by government was a positive multiplier, shouldn’t we have full employment and a budget surplus by now?

    1. but, but… That’s only $200,000 per working person. It only cost them as much as their house taking for granite that’s not already on debt but paid for.

      1. The language is a little rocky, but I shalen’t disparage the message. I’ll chalk it up to speedy typing.

  14. COVID stimulus cost, $5 trillion (or so).
    Proposed expanded US welfare nanny state, $6 trillion (per year).

    Creating a frightened, dependent, and compliant population, priceless.

    1. Communists in China and Nazi Germany did that.

      Milton Friedman said the Chi Coms were voted in after promising to rescue the 1930s economy. They did- they crashed the currency.

      Nazis rose to power on the back of an economic crisis.

  15. This study makes a huge assumption that should never be made, but is almost always made: spending = growth. Analyzing whether government spending crowds out private spending is irrelevant. The assumption that a dollar of government spending is equivalent to a dollar of private spending, in terms of value (which is all the counts ), is laughable.

    1. Not only is spending not growth but they are not spending money.

      They are using digital credits.

      Spending would be related to growth if it were increased tax revenue due to real economic expansion. Thats not happening.

  16. The Keynesian fiscal multiplier I was taught in college always struck me as phony — a means of re-counting the money (not actual value production) every time it was passed around. The money multiplier is real, but not the fiscal one.

    1. The money multiplier is not necessarily real. The way I was taught it, the analysis follows the dollars spent, but not the dollars that aren’t spent because of the government action. The government has to get the dollars from somewhere. That has implications, whether by increasing taxes, increasing borrowing, printing money, etc.

    2. not about the money its about underlying macro economic growth. Take in iron, produce cars.

      This fake economy we have now is mostly trading in finance. Not goods.

      1. Sorry, but financial services are hugely productive.

  17. This sort of analysis is why economics is autistic now. You can’t just focus on some tiny thing that’s connected to a lot of other things and just assume away all the things you’re not looking at as constant (ceteris parabus). At best this is a child’s way of initially learning about something that’s complicated. For an adult – this is just purely lies to sell an agenda – out of a habit that is no longer understood but remains a habit.

    First, there is no such thing as a ‘government spending’ dollar v a ‘private spending’ dollar. It’s the same dollar. The only thing that’s different is how that spending dollar is created/funded. And before ideologues head down their path of lies and flimflam about printing money that means government spending funded by tax revenues is massively different than government spending funded by debt.

    Spending funded by tax revenues can be analyzed with the multiplier stuff. You’re comparing income statement stuff to income statement stuff. So a private decision to spend/save that gets turned into a govt decision to take that money and spend it – that can be analyzed as apples to apples. But that’s not what this spending was – was it. Hasn’t been that for freaking decades.

    This spending was funded by creating debt. If there was some ‘crowding out’ effect, then the only way it can show up is via higher interest rates. Some increased competition for a limited fixed amount of debt where ‘govt’ spends the proceeds of that loan incompetently compared to private lending. But this is all fantasy gibberish isn’t it. There is no fixed pool of debt. The most obvious impact of this govt spending was an immediate and large increase in house and stock prices. Which isn’t apples to apples but apples to oranges – increased govt spending that results in increased asset prices on private balance sheets.

    and even if one could sniff some debt crowding out effect, the marginal productivity of debt has been declining a lot since WW2 and will keep declining. So even a constant crowding out effect wouldn’t result in a constant impact.

    Useless profession. Needs to be blown up.

    1. JFree’s absolute best effort to explain his expertise to hoi poli here:

      What needs blowing up are ego-maniac assholes like you


  18. Looking forward to an episode on EconTalk!

  19. It’s been many years since college econ courses, but I seem to remember that the “multiplier” concept was twinned with something called “velocity of money” which, forgive me if I’m wrong, theorized that the government could spend money faster than the plebes could, thus generating more “stuff.”

    1. Although that connection was made, velocity of money was brought up more commonly in regard to monetary theory. It would explain why, for instance, although more currency was injected by governments last year, prices didn’t go up, because the velocity of money was lower. That is, due to the pandemic, people weren’t spending as much, so the extra cash just piled up.

    2. It WAS velocity. Velocity is a first order math function.

      Theyve gone into Derivatives which is calculus. Literally. Theres such math literally behind economics.

      With Derivatives they can create money from nothing.

      1. You still have the problem that MV=PQ. The argument above is that an increase in M (by whatever means) was being offset by a decrease in V, due to the pandemic lockdown. As the country returns to normality, V is going to rebound, as spending returns to normal, and the only place to compensate is for P (price level) to increase (Q (quantity of goods and services – nominal GDP) cannot magically increase to offset this, and is thus probably the least variant of the four variables). Thus, arguably, why we are all of a sudden looking at maybe 5-6% inflation this year.

  20. >>“A new study finds that as the government expands, the private sector shrinks.”

    is the new study called History of the Western World?

    1. If “History of the Western World” were allowed, it would be.
      There is more than racist anti-Semitism to the democrat party platform.

  21. “A competent Federal Reserve” Depends on what you consider competent. Despite the official goals/objectives/blahblahblah, It really only exists to protect it’s member banks from their profligate and reckless lending and to allow politicians and bureaucrats in the federal government to spend as much as they want.

  22. Government spending surely replaces some private sector spending- and given the lousy track record of so many government programs, it’s easy to agree that a lot of government spending is ineffective, counterproductive, or at the very least, very sub-optimal. Of course, private sector spending efforts often fail – but that gets fixed pretty quickly. A failed business goes away, but a failing government programs seems to never die. One thing that this article doesn’t mention directly, is that we live in a credit-based economy. Most of the growth in the money supply, in a healthy economy, comes from the private sector: bank lending. Loans create deposits, one person’s spending is another person’s income. I wonder how much higher private sector debt levels would be if federal spending (and debt) were significantly lower. It’s a balancing act – and one that we can only guess how to manage without a lot of economic pain.

    1. Hard to imagine how much higher private sector debt could be. Of the G20, US is 6th highest private debt. Canada is highest with a serious housing bubble waiting to explode. Netherlands (trade loans) and Switzerland (banking) is mostly financial sector which is a different animal. France has high corporate debt which is apparently mostly a tax game. Korea is another household debt bubble waiting to explode.

      We are trapped everywhere. The debt needs to clear so we can reset investment towards things with an actual return rather than everything with a pulse. But at this point, resetting the debt will mean the mother of all great depressions

  23. I’m curious exactly which traditional economic textbooks were reviewed to conclude that “Economic textbooks traditionally claim that the government multiplier is high.” Back when I took economics, my text was quite clear that the multiplier was:
    – not precisely understood
    – varied based on time and politics – meaning that it was probably dependent on variables not yet identified
    – regardless, it was almost certainly less than 1. The only question was how much less.

    Yes, the Keyensians claimed that it was greater than 1. And the neo-Keynesians are again raising the same debunked claims. I would hardly call those neo-Keyensian texts “traditional”.

  24. Same as Marxist economics is based on the idea that there’s overproduction, Keynesian economics is based on the idea that people save more than is good for the economy. So by such means as fiscal and monetary “stimulus”, Keynesian manipulation is aimed at diverting assets from savings into investment. Only…it doesn’t. At least not into efficient investment. It neglects that assets are saved — kept unused — for a reason: that better opportunities to deploy them are anticipated. It’s the same reason Georgist efforts against land speculation, and other populist animus against speculation, is wrong: because idleness is often a better condition for an asset to be in than committed to fixed capital.

    1. “Keynesian manipulation is aimed at diverting assets from savings into investment.”

      False. Keynesian policies revolved arounfld manipulating interst rates to control economics.

      What you refer to is individual spending or saving.

      Were not in Keynes anymore, were in Friedman.

      Money is not real, its computer credits
      Helicopter drops of money

      Actually according to Friedman, were even post- Friedman headed into uncharted territory.

      Read Money Mischief.

  25. Government can’t create.
    Government can only redistribute or destroy.
    And government redistribution entails much destruction.
    And government destruction entails much redistribution.

    1. And it’s Tump’s fault, right, TDS-addled asshole?

      1. No, it’s inherent in government.

        Republicans, like Libertarians, knew this and fought, if with variable success, for limited government – until Trump.

        Trump is a full surrender of the American Experiment in growing liberty and prosperity to statist squabbling for slices of an ever shrinking zero sum pie.

        1. The only difference between Trump and progressives is they couldn’t agree what to spend all the borrowed money on.

          1. “The only difference between Trump and progressives is they couldn’t agree what to spend all the borrowed money on.”

            There is no difference between you and the TDS-addled asshole above.

        2. “…Trump is a full surrender of the American Experiment in growing liberty and prosperity to statist squabbling for slices of an ever shrinking zero sum pie…”

          Thanks for once again proving what a pathetic piece of TDS-addled shit you are.
          Fuck off and die.

  26. Their premise is false since the current crisis of economic collapse ca. 2009 is being propped up BY Govt spending.

    The lie was floated 2011 ish that the Obama bailouts fixed the economy, thus things have improved since.

    They lie about unemployment by only countung new claims while ignoring long term joblessness, throwing the Victims under the bus.

  27. Government confiscates.
    Free People create.

  28. ‘Many Politicians Claim That Increased Spending Sparks Economic Growth’

    I don’t even have to read past the headline to construe that infrastructure supplied by government drives spending, and that consumers hate potholes when driving to brick & mortar shops.

    1. That day I saw the U.S. Military out fixing potholes…. Never…
      Wrong level of government.

  29. An economist is someone who sees something working in theory then sets out to prove in won’t work in practice.

    1. Not every economist, but every GOVERNMENT economist.

  30. Has Reason ever considered the Democrats know exactly what they are doing? Trying to cause an economic collapse, multiple crisis’s, declare martial law, and take over with a permanent Socialist dictatorship. I now that might sound far fetched, but so did many other government take overs. The Democrats now have a puppet President, they are purging the military, defunding the police, and supporting Antifa and BLM. Makes you think.

    1. I’m afraid your scenario is correct, but I’d say a small percentage know what they’re doing, the rest are the “useful idiots” . These people think socialism, communism, and freedom are compatible. Some of the useful idiots even write for Reason!

    2. They’ve been pining for the USSA, since the USSR was in existence.
      The LieCheatSteal party’s answer to everything is to tax, and spend. Taken to the extreme, that means everything we make goes to the government, and the government decides who gets what.
      From each according to his ability, to each according to his needs.
      And the only ones, with any kind of wealth, get that way through party loyalty.
      That was the Soviet system.
      Someone tell me how this is not what the left wants here.

  31. If govt was an investment we wouldn’t be running deficits. And the USSR would not have gone bankrupt and dissolved.
    End of story…time to cut most of the Federal Govt..any good investments will be from the local level if at all not DC..shut it down..shut it all down

  32. Economics and multiplication are not about just shoveling money around, its about creating finished goods from raw materials.

  33. The multiplier argument tacitly assumes that only government spending generates a multiplier effect. But this makes no sense. Are the downstream economic effects of, say, a government agency purchasing copier toner different than if it was purchased by private company or an individual? Does the economy somehow know that this is different colored money and channel it down some other beneficial path? Of course not. The multiplier argument applies to all spending. This is a classic case of ignoring opportunity cost – what the government spends is visible, what the private sector would have done with the same money is invisible, and the economic benefits foregone by the government spending is the opportunity cost. The real question is whether the multiplier, i.e. the downstream economic benefits of spending, are greater for government spending than for private spending. Since government spending is not made on the basis of economic efficiency, it will never yield a better economic outcome than private spending. Each company or individual can decide how best to spend to maximize benefit for them. In contrast, government spending comes in the form of one-size-fits-all programs which can never be optimized for everyone.

    1. The color of money remains green. Just like the envy of those who covet more government spending so they can perhaps get some of that for themselves without having to deal with the risks of a marketplace.

    2. It fact, no, it doesn’t. It also assumes that if I buy a car, that money multiplies as the people making cars get more money to spend, which gives employees and suppliers more money to spend. De Rugy just ignores that aspect because she has no moral objection to it.

      A lot of private spending is targeted at improving the value of the CEO’s portfolio. Corporate incentives can be just as perverse as government ones.

      1. I don’t understand how the multiplier works even after reading this. The money doesn’t multiply; it just changes hands. Where does the new money enter the system?

  34. “Many Politicians Claim That Increased Spending Sparks Economic Growth.”

    And, an overwhelming majority of the population has been indoctrinated to accept this Keynesian philosophy.

    “Here’s Why That’s Misleading.”

    Tell that to John Q. I know I’ve tried in my lifetime. I’m damn lucky I haven’t been lynched for suggesting that FDR wasn’t an economic savior and that we’d be better off without the New Deal mentality.

  35. “Many Politicians Claim That Increased Spending Sparks Economic Growth.”
    Anyone, who thinks this is the case, is an idiot.

    1. Would you include the Republicans who advocate tax cuts on the theory it will lead to increased spending by the wealthy, leading to economic growth?

  36. It seems there are very basic theoretical problems with the Keynesian multiplier that the author never touched on. The argument against spending presented here is thus hard to follow and not very punchy.

  37. Anybody can do a study that can prove anything they like. So I went looking for de Rugy’s study. No link here. What I find under Research on her webpage at Mercatus includes no data, discussion of methods, or analysis. It certainly hasn’t been published in a peer-reviewed professional journal.

    I give her puff piece a credibility rating of 3 out of 5.

  38. Democrats are now in the Dick Cheney camp of economics. Deficits don’t matter. There is now bipartisan agreement. Isn’t bipartisanship great?

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