On the Nature of Government Spending

Let’s assume that $100 pays for 100 jobs that create 100 goods. For our purposes it doesn’t matter who spends the money: the jobs will occur and the goods will be created. It does, however, matter how the money is obtained.

In the private sector, the $100 must be accumulated through productive industry — that is, by creating goods. Government, however, obtains the $100 by subtracting it from the private sector. Thus, for government to spend $100, the private sector must spend -$100. By virtue of subtracting the $100 from the private sector, the government can never produce, on balance, more than zero goods.

It is possible for the goods government creates to be beneficial. Roadways and water systems are examples. But notice two things: (1) the subtraction of money from the private sector still occurs, and (2) it is not inherently or necessarily the case that the government-created goods are better than the private-created goods would have been, had they been created.

Various other considerations are in play. For example, government can create money to spend without subtracting it from the private sector. In that case, government gets the benefit of spending $100 to create 100 goods without offset, except that the $100 then becomes an increase in the money supply, which causes a corresponding amount of monetary devaluation that the private sector will experience as an equal material loss (-$100, or -100 goods).

Another example: Some government spending is inherently non-productive. Broadly speaking, military spending is in this category. Despite being necessary and desirable, the defense industry literally produces no goods. Consequently, the $100 that pays for 100 jobs and produces zero goods on balance (after accounting for the private sector losses) actually creates -100 goods on balance when government uses it to fund the military.

The takeaway here is that it matters after all who spends the money because the implications are different based on how the money is obtained and then spent. It is one of the greatest tragedies of human experience that many people think government can do good easily. Government can certainly do good, but not easily, as some dreamers imagine.

5 thoughts on “On the Nature of Government Spending

  1. Your “kitchen table” economics is worth than useless.

    For example, it depends on what the private sector would be doing with its money and that depends on who has it. For example, an undertaxed billionaire is very likely to invest huge amounts in U.S. Government bonds. Far better for everyone – except that billionaire – to tax the money in the first place and not have to borrow it from him and pay him interest every year. That is what the GOP has been doing with all its tax cuts.

    Or, for example, a billionaire might spend his excess cash on a luxury yacht for say $100 million. Great for people building yachts. The government might tax that $100 million and spend it to repair 50 dangerous bridges. Great for people who build bridges and for EVERYBODY else who wants safe highways. In the end, same amount of wealth but one choice is definitely better for more people.

    No need to get into that billionaire buying Euros and moving them to the Cayman Islands.

    Your economics also leaves out the fact that the government can create new money and put it to work building goods. In a less than full employment economy that $100 of goods produced can be increased by that process.

    etc. etc.

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    1. You should read more carefully before spouting off, but I’ll address two of your criticisms.

      RE: “For example, it depends on what the private sector would be doing with its money and that depends on who has it.”

      No, it doesn’t. The first paragraph rules out that very contention. But let us presume, as you do, that some members of the private sector spend their money productively, whereas others do not. In that case, government spending based on private sector subtraction could produce net goods only in proportion to the goods the private sector doesn’t produce.

      But notice that if all, or most, of the private sector was non-productive, the economy would shut down and there would be no way for government to subtract any money from it in the first place. Hence, the presumption: “In the private sector, the $100 must be accumulated through productive industry — that is, by creating goods.”

      RE: “Your economics also leaves out the fact that the government can create new money and put it to work building goods.”

      No, it doesn’t. I devoted a whole paragraph to this very consideration. Creating new money necessarily devaluates the existing money supply, which itself is a way of subtracting from private sector money.

      The model I describe is realistic because it shows that it is impossible for government to operate, except as a parasite on society. The parasite need not, of course, kill the host.

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      1. You want to refer to your model which may be internally consistent. It does not match the real world which is why it is not useful. In the real world it DOES matter who has the money that the government taxes and what they would have done with it absent that taxation.

        A major flaw of the model that I skipped over before is that it is based on a fixed amount of money. Money does not work that way. It has never worked that way even when we were on the gold standard.

        “Creating new money necessarily devaluates the existing money supply . . .”
        No, not necessarily. If that new money is used to put idle resources to work productively then new “goods” come into existence and the currency is not devalued.

        Your model definitely does NOT prove that the government only operates as a parasite. This is a clear case of a conclusion grasping vainly for “evidence.” It may set different priorities than you would like (e.g. safer bridges vs more yachts) but that does not make it a “parasite on society.”

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      2. RE: “A major flaw of the model that I skipped over before is that it is based on a fixed amount of money.”

        No, it doesn’t. I note that increasing the money supply necessarily devaluates the currency, which is a truth known to economists ever since Copernicus.

        But perhaps you are confusing monetary inflation with price inflation, since it is true that price inflation doesn’t always or immediately follow monetary inflation. The point I make is only that monetary inflation becomes recorded in a material way in the actual economy.

        You seem determined to show that government can spend money as well or better than the private sector, but while the model I present admits that possibility, it emphasizes that the money government spends is always a subtraction from society. If you can show that the subtraction doesn’t occur, you might be able to make an argument.

        But you can’t.

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  2. Biden government spending has become outrageously out of control. Even some Democrats are waking up to the repercussions of passing out free dollars for votes. Not only is it money taken from the private sector but newly printed money too and, in addition to creating government dependency, it’s unsustainable. Democrats love plantations for some reason.
    https://www.google.com/amp/s/news.yahoo.com/amphtml/family-six-gets-hefty-monthly-130016354.html

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