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  • Government Spending Is Never the Answer

    A Christian Science Monitor article this morning argues that Roosevelt didn’t spend enough to jolt economy into recovery. Only when spending skyrocketed for World War Two did the economy recover (unemployment finally dropped, of course this was because everyone was mobilized either as soldier or to support the war effort – creating things which were then destroyed in fighting the war). The Article claims that “One big reason is that President Roosevelt didn’t spend enough to really boost the economy, historians say.”

    Notice, that it isn’t economists that argued that the programs should have been bigger in order to boost the economy, but historians. This is like getting a philosopher’s opinion on astrophysics. It’s nice, but it shouldn’t be taken as expert.

    The article goes on to point out that many economists do think that government spending can stimulate an economy. So, let’s examine this argument a little more closely. After 1929 and before World War Two, federal expenditures tripled as a percent of Gross Domestic Product. If we tripled federal expenditures as a percentage of GDP today, that would mean an additional 8.2 trillion dollars in government spending each year. That is because federal expenditures are already 20 percent of GDP.

    Perhaps we don’t have to also triple the government’s role to have the same “stimulus” as Roosevelt. One might argue it is the amount of spending as a percentage of the economy that matters. Roosevelt added about seven percentage points overall of additional annual federal spending (bringing spending from about 3 percent of GDP to about 10 percent).

    An additional seven percentage points of GDP today constitutes an additional $1 trillion per year. This is a lot less than 8.2 trillion, but it is still nothing to sneeze at. Yet, are we not already pouring in this much to the financial bailouts? This is the same amount of additional government spending already – hence the need for journalists to argue that FDR’s additional spending wasn’t enough.

    The problem is that government spending will never be enough to stimulate the economy. Just think about it this way. We have GDP of about $42,000 per capita. The federal government spends about 20% of GDP. In England, government spends about 45 percent of GDP and GDP per capita is about $33,000. In Sweden, the government spends about 50 percent of GDP and GDP is only $32,000 per capita. In France, it is 53% and $30,000. As we all know, in countries where government spends approximately 100 percent of GDP hardly any output or value is created. This insight formed the basis for such respected indices as the Index of Economic Freedom.

    So, the idea that injecting a jolt into the economy by having government spend more as a percent of GDP is highly suspect. If what Roosevelt spent was not enough – despite tripling the government expenditures at the time – we should wonder whether any amount will ever be enough.

    Posted in Economics [slideshow_deploy]

    6 Responses to Government Spending Is Never the Answer

    1. Andrew Ian Dodge says:

      Good piece and a point that has to be continually made. Government does not spend money efficiently, effectively or timely. The taxpayer is best at spending their own money.

    2. Barb -mn says:

      Absolutely! The government is robbing us continually creating nothing but EXCUSES FOR MORE UNNECESSARY GOVERNMENT. The people have to reform the duties of government with job description, as EVERYDAY EVIDENCE CLEARLY SHOWS GOVERNMENT STEPS OVER THE LINE CREATING MORE AND MORE WASTE! Every person of authority in government office should be charged a carbon tax.

    3. Pingback: Dodgeblogium » Government spending is never the answer…

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    5. Spiritof76, New Hamp says:

      Why are so many of the so called economists devoid of common sense?

      Where does the government get its money to spend? It confiscates productivity to basically distort the market. It sucks up the capital that will be needed to continually improve productivity which is at the root of wealth creation.

      Another way the government gets money to spend is to simply print it. Since the money being printed does not have any backing, it will invariably result in inflation and that is another way to tax productivity.

      The third way for the government to spend money is to borrow it. Again, the debt will have to paid back on future productivity.

      Every one of the above avenues for the government to spend more money will mean economic stagnation and not growth. The stimulus idea is equally stupid. The government siphons off the market allocation of capital for growth into artificially created consumer spending that can not be sustained as the economic growth is slowed to that extent.

      Every socialist economy will fail for those reasons and we have plenty of rotting and rotten carcasses to remind us of it.

      Our founders had it right. Minimize the government footprint to as small a size as possible to realize the Constitutional objective of "pursuit of happiness".

      If we eliminate the corporate taxes and capital gains taxes, reduce government spending, stop printing money and bailouts and stop interfering in the market, the country will rebound with vigor as never seen before.

      FDR actually prolonged the Depression of the 30s. More government spending would have deepened the Depression and would have prolonged it further. WWII resulted in destruction of the economy of the majority of civilized world while we remained largely unscathed. Our productivity rapidly filled the world-wide demand following the WWII. That scenario largely contributed to our recovery. If we had lost the war, we would have continued our way into a worsening depression.

      Government spending is not a solution but actually a problem.

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