The Fallacy of Government Spending

Posted: Jul 17, 2012 12:01 AM

There has been a pretty heated argument over the past few years on the effect of government spending having a stimulative effect in the economy. Keynesians say it’s positive. Others say it’s zero or perhaps even negative. Certainly it’s not 1:1.

Mark Perry has an excellent blog you should read on food stamps. But his food stamp analogy carries over to all government transfer payments. Every program. Not just your favorite ones. Every one. That includes Social Security and Medicare.

In an economy, the economic effects from a transfer program always sum to zero. Simply put, there can be no economic stimulus from increased food stamp usage.

Given the massive inefficiencies the government creates in transferring resources from one group to another, along with the disincentive effects for those Americans who are de-stimulated through higher taxes, there might actually be an overall negative net effect on economic activity.

If we look at the facts on the ground, Obama’s economic plan has destroyed economic growth. The Geithner plan to re-capitalize banks and make them healthy has not made banks any better. As a matter of fact, since the passage of Dodd-Frank, the velocity of money through the economy has slowed to a trickle and we have had little GDP growth.

Combine the knowledge that government programs do nothing to stimulate economic activity with the welfare cliff and one can understand that the economic incentives for growth as presently constructed in the US are totally screwed up in favor of no growth.

Government programs are creating incentives to stay home and not work. We are seeing that reflected in the labor participation statistics as the rate has gone down consistently since Obama has been elected.

If we are going to change the outcome, we need to change the incentives. The path that Obama and the Democratic Congress put us on in 2008 was horrific when it comes to growing an economy.

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