I guess the idea of deficit spending is so that when the economy is in a recession, the government gives money to the people through the deficit, thus creating a demand. This increased demand will increase economic growth. Then, when the economy is growing, you pay back the deficit?
Am I missing something, or is this a legitimate way to "stimulate" the economy out of a recession?
Government spending (among other things) got us into the recession. More spending will certainly not do anything but worsen the situation.
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When you say "the government gives money to the people", where does it get it from? Either it borrows it from the commercial money markets or it prints the money. In the case of the former, is it not just taking money from one group of people and lending it to another? Weakening demand in one area to increase it in another? How does this help increase economic growth?
The money from deficit spending has to come from somewhere. It either comes from taking on more debt, printing the difference, raising taxes, or some combination. When the government takes on more debt, it raises interest rates for private borrowers, therefore hurting the economy. If the government prints the money, then you have inflation that takes real value away from the private sector. Lastly, if the government taxes, then it directly takes away from the private sector. Whatever it does to fund its deficit, the government will crowd out private investment and redistribute that wealth, thereby slowing economic recovery.
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krazy kaju:Lastly, if the government taxes, then it directly takes away from the private sector. Whatever it does to fund its deficit, the government will crowd out private investment and redistribute that wealth, thereby slowing economic recovery.
The counter to this is that there is nothing to 'crowd out' in recessionary times. But Bob Murphy ably took care of the argument from idle resources.
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Law of Conservation: you cannot consume more than what you produce.
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krazy kaju:When the government takes on more debt, it raises interest rates for private borrowers, therefore hurting the economy.
It also crowds out private investment, because there is less money available for private investment since it is being invested into government bonds.
At most, 5% of the population would need to stop complying to bring down the government.
It also does not satisfy consumer desires, it is a waste of resources.
The source of the money has already been discussed. The other side of the "stimulus" the spending side is also disasterous and does not stimulate anything. Governments find it easy to create money. The issue is that it isn't so easy to create scarces things bridges, roads, schools, cars, trains, planes, automobiles, TV sets, health care, etc. The government uses a dizzying array of "experts" to help it distribute the money to projects that the government or experts want and NOT WHAT CONSUMERS WANT. So consumers have less resources to do things like buy clothes, food, energy, furniture, pay bills, etc.
This disconnect between what consumers want and what government wants causes even more resources to be wasted. Then to add violence on top of carnage, the government has no feedback mechanism, PROFIT and LOSS, that tell suppliers, in this case the government, which projects consumers desire and which ones they do not.
Stupid people want to build a "High Speed Train" (One that goes 51mph or greater, not the kind that go 200kmh) between Cincinnati and Cleveland. The MASS MAJORITY OF TRAVELERS will wave at the train in the middle of the highway slowing from 60 to 0 to make the next stop as they drive the same distance in a shorter time and then have a car when they get there. What an enormous waste of resources goes into the High Speed Train. Consumers are better off leaving these resources idle to find other things to do than to build the train.
Lots of great answers.
A couple days ago I thought about how useful it would be to create a few simple charts displaying the effects of government borrowing, inflating, and taxing, each compared to a "control" of no government intervention, all with clear explanations as to why the effect of each government intervention causes the total wealth produced to be lower in the than it would have been without the intervention, whether it increases wealth in the short term or not. It could be applied to the number of jobs specifically as well, since that's such a popular concern. The way I'm visualizing it is just a simple "line chart" with general wealth over time, with one line for no intervention and another with a point or period in time where intervention is occurring, and how it affects the rate of wealth accumulation. Or is this not a good way to present this?
Anyone have any ideas how this could be done easily? (or if it's already been done?) I can probably pull it off in GIMP or Inkscape, but maybe there's a better tool for this, or someone else with some artistic skills is willing to do it?
To sum up what billott said, government spending consumes capital. The flip side is private spending creates capital. So since the government is crowding out private investment and expenditures, it comes down to it is wasting almost every dollar it spends.
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