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October 14, 2008

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Super Saver

Syd,

Yes and the problem with government spending is that it is relatively inefficient at stimulating today's economy. It reduces the amount of money available for innovation and other better drivers of economic growth. In addition, it takes money out of the hands of consumers, who have been one of the main drivers of economic growth.

I see the challenge as CHOOSING to focus on what best stimulates the economy, not doing everything that could stimulate the economy. If consumer spending is a bigger driver of the economy than government spending (which I think is true today), then cutting taxes and reducing government spending can have a net improvement in the economy.

Retired Syd

The thing is, a consumer is a consumer is a consumer. All their money is green, whether they work in the private sector or whether their employer is the federal government. (Or even, unfortunately, if they borrow the money instead of earning it.)

The economic effect of a dollar spent by the consumer is the same no matter where they got that dollar.

Micheal Lehman addresses this issue in this book. It was John F. Kennedy's team of economists that proposed stimulating consumer demand by cutting taxes rather than stimulating it with government spending:

"The government would still have to borrow to meet the deficit but this time it would do so to pay for a shortfall of revenue rather than a growth in expenditure. One way or the other, demand would grow.

Increased consumer spending was just as good as government spending--and as a rule, politically more advantageous."

Super Saver

Syd,

Yes, I fully agree a consumer is a consumer. I was not differentiating between government employees and private sector employees. The difference I noted is between spending by consumers and the government, which is not a consumer. Government spending takes away from producing goods that consumers want.

If increased government spending efficiently stimulated the economy, why hasn't the additional spending on the Iraq war signficantly stimulated the economy?

Retired Syd

As your Economics professor for the day, I'm not here to make a judgement about whether the a's b's or c's are better or worse--just to point out that they have the same stimulative effects or dampening effects on the economy. Here's another pop quiz:

How was demand eventually stimulated so that we finally got out of the Great Depression?

a) Tax cuts
b) Interest rate cuts
c) Government spending

Answer: Government Spending

The government was the "employer of last resort." It didn't matter to the economy whether businesses hired these people or whether the government did. All that mattered was people got jobs and then fueled the economy by spending their paychecks.

The choices among the methods are political choices, not economics.

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