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How does government spending within the economy drag down the economy?


feargach

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Interesting question this. Most economists agree that government spending within a nation's borders automatically boosts GDP, as GDP is simply the aggregate of spending. But apparently some people think they know better. Let's hear their arguments.
 


sic transit

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Eh why don't you go first? Pretty underwhelming OP.
 

meriwether

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What is the source of the funding, what is it being spent on, and what is the return (if any)?

From the sparseness of your OP, I can only deduce that you think any and all spending by a government is automatically beneficial to the economy. I see no caveats or qualifications in your post to suggest otherwise.

That would be an economically illiterate argument.
 

daveL

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Interesting question this. Most economists agree that government spending within a nation's borders automatically boosts GDP, as GDP is simply the aggregate of spending. But apparently some people think they know better. Let's hear their arguments.
that all depends how governments spend that money doesn't it...

For example; taking 500,000 in taxes and placing it in Eamon Gilmore's wife's bank account is not good for the economy.
 

The System Works

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Interesting question this. Most economists agree that government spending within a nation's borders automatically boosts GDP, as GDP is simply the aggregate of spending. But apparently some people think they know better. Let's hear their arguments.
So, do you think taking water out of the deep end of the pool and throwing it in the shallow end might make the overall level of water rise?
 

Trainwreck

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Interesting question this. Most economists agree that government spending within a nation's borders automatically boosts GDP, as GDP is simply the aggregate of spending. But apparently some people think they know better. Let's hear their arguments.
We could start by correcting the errors in your premise.

GDP is a measure of domestic product (the DP part). It is "simply" the some of all output. The system of National Income Accounting and the circular nature of output/income/consumption means that you can make an estimate of GDP by aggregating consumption. Do not confuse that to mean that GDP is the aggregate is spending. It is not.


When you understand that, you will be able to frame a proper discussion, or more likely realise your question makes no sense.
 

stopdoingstuff

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GDP is not the goal. If GDP was the goal, then the government ought to hire all the unemployed, get half to dig holes and get the other half to fill them it. The goal is to meet consumer demand and to invest resources productively. These are the bases for real long term economic health, and the government can only do so much in that regard.
 

Trainwreck

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I do wish those people who lob in with "economists don't understand economics" would first learn the most basic economics first.
 

statsman

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Eh why don't you go first? Pretty underwhelming OP.
Underwhelming, yes, pretty no.

A few links might have helped.

DILACERATOR: Government spending and GDP growth

Economic growth is not contractionary, and other confusions about stimulus and spending

http://www.fordham.edu/images/academics/graduate_schools/gsas/economics/causal link between government spending and revenue.pdf

From the first:

The total cumulative outperformance of the US economy relative to the Eurozone does not change if you take government consumption out. This is a somewhat surprising result, in that one might have expected the gap to widen. But the spending binge by the US government since 1997 has led it to pull even with the Eurozone in this regard. However, the crucial difference is that the US economy has been able to grow in its other GDP sectors too, whereas all the Eurozone growth since 1991 has been due to government consumption growth. That's not a sustainable or healthy position to be, witness the plight of Japan. Moreover, the share of GDP coming out of government consumption in the US has been declining, although the recession has nudged it back up. In th Eurozone, the share has remained constant.
From the second:

Most of the time “austerity” is a misleading word and more precise concepts — readily intelligible I might add — are available. There really are some times when we should relabel austerity as “mostly tax increases,” but many people are reluctant to do so.
From the third:

This paper examined the causal relationship between government spending and government revenue in the case of Botswana. Following the methodology used by Darrat (1998), in addition to the bivariate model, a multivariate model is specified in this paper. In the multivariate model, two control variables; GDP and interest rates (bank rate) are also incorporated to try and avoid the problem of omission of variables The two models however give very similar results showing that there is a unidirectional causal link running from revenue to spending in the case of Botswana. This supports the tax-and-spend hypothesis of Friedman and Buchanan-Wagner. The relationship is also shown to be negative and therefore like Buchanan and Wagner (1978) suggested; government budget deficit can be corrected by raising taxes.
 
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Cassandra Syndrome

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Where does the money for Government Spending come from to begin with? It comes from the real economy from taxation or worse still borrowing.

What would people do with this money if it wasn't displaced by taxation? They would spend or save it, which boosts the real economy. Government intervention is handicap to the advancement of our quality of life. Here is a superb allegory about the fallacy of government spending helping the economy from the French economist Federic Bastiat from 150 years ago.

Parable of the broken window - Wikipedia, the free encyclopedia
 
D

Dylan2010

Opportunity cost..simples. If not true then Easter Island or the Roman Empire for that matter would still be thriving societies, believe it or not it actually matters how an economy saves, invests and spend. The OP assumes that more smoke coming out the back of a car is a good thing
 

BeTheJay

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It all depends on what you do with it. Because you're borrowing it you have to spend it wisely and most importantly get a return on it. Im thinking of that great phrase, "return on investment". Use it for capital projects, fine. Current expenditure (wages and pensions), bad.

My 2 cents FWIW.
 

Taxi Driver

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Government spending on social transfers or government spending on the interest created by borrowing in the past to spend on social transfers and other things are not included in GDP. All this does is move money around and though there will be some equity benefits the overall system is negative for GDP.

Government spending on wages, infrastructure and goods and services are included in GDP. The problem here is not that these items don't add to GDP (they do), the problem is the price the government pays for them. Wages can sometimes be used as a form of transfer, infrastructure projects with no net benefit are sometimes undertaken and the procurement and tendering processes are sometimes the subject of inflated prices and questionable allocations.

Not all government spending is bad, but just because some of it is good does not mean that more is better.
 

davoid

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Interesting question this. Most economists agree that government spending within a nation's borders automatically boosts GDP, as GDP is simply the aggregate of spending. But apparently some people think they know better. Let's hear their arguments.
thinking government spending helps the economy is like a struggling retailer borrowing money to buy stock out of his shop and then being delighted that sales are up
 

Spanner Island

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No good can come from state spending when it's funded by borrowing on top of already unsustainable debt.

Crap OP btw.
 

statsman

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Government spending on social transfers or government spending on the interest created by borrowing in the past to spend on social transfers and other things are not included in GDP. All this does is move money around and though there will be some equity benefits the overall system is negative for GDP.

Government spending on wages, infrastructure and goods and services are included in GDP. The problem here is not that these items don't add to GDP (they do), the problem is the price the government pays for them. Wages can sometimes be used as a form of transfer, infrastructure projects with no net benefit are sometimes undertaken and the procurement and tendering processes are sometimes the subject of inflated prices and questionable allocations.

Not all government spending is bad, but just because some of it is good does not mean that more is better.
Government spending on infrastructure, and not-for-profit services such as education and healthcare are fundamental to the success of capitalism.
 

sondagefaux

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Government spending on infrastructure, and not-for-profit services such as education and healthcare are fundamental to the success of capitalism.
The internet and the World Wide Web, both of which have enabled trillions in private business activity, are both largely creations of government.

Given the scale of the profits being made from the internet, and the scale of the bailouts of banks and other businesses (including past bailouts), not to mention the benefits to business from government spending on the sectors you mention, I think it's certain that the overall effect of government spending has been positive for private business and the ability of capitalist enterprise to operate.

Anybody who thinks that private enterprise would have provided free education to the bulk of the population, or free or heavily-subsidised healthcare, or brought electricity to rural Ireland, is a fantasist.

People often mention Singapore as a model capitalist society. What they usually fail to mention is the degree of state involvement in business in Singapore:

While the private sector has been the source of Singapore’s economic success, the government maintains a proactive role in guiding economic development. State ownership and involvement in key sectors remains substantial. A government statutory entity, the Central Provident Fund, administers public housing, health care, and various other programs, and public debt is over 90 percent of GDP.
Singapore Economy: Facts, Data, & Analysis on Economic Freedom

A Background of State-Guided Entrepreneurship in Singapore

Lee Kuan Yew (hereafter Lee Senior), Singapore’s first prime minister (1965-1990) and currently minister mentor (2004-present) said, ‘we did not have enough entrepreneurs, and those we had, lacked the capital or interest, so Government ministers undertook the task of starting new venture(s)’.

...

Lee Senior and his government, then, either did not believe that private entrepreneurs could be developed or relied on, or believed that state
bureaucrats were more trustworthy to drive the economy. Apparently, thereafter Lee Senior and his government proceeded on the path of state guided entrepreneurship. Interestingly, it has been convincingly argued that people can be motivated to undertake different tasks, and there is no reason why civil servants cannot be entrepreneurially innovative.

...Lee Senior’s answer was the incorporation of a government holding company, Temasek Holdings that was tasked to oversee all state ownership and entrepreneurial activities.

...

Sim Kee Boon, formerly head of the civil service, and director of Temasek and several GLCs recalled, ‘Two decisions were made: Invite
multinational corporations to enter our market and get the Government involved, to give confidence to the whole industrialization effort. There was no conscious decision which industries the Government would go into—we were even making pyjamas! The objective then was simply job creation. It was an eclectic and pragmatic policy’. The government’s move into business was initially intended as developmental where state interest in nvestments would lead to economic growth, principally job creation, but because of the faster rate required for industrialization and a lack of local entrepreneurs, the government was forced into business collaboration with foreign companies that went beyond mere developmental objectives.

Consequently, the government’s business interests grew phenomenally; according to Sim, it accounted for some 60% of Gross Domestic Product (GDP) by 2000.
http://www.nzasia.org.nz/downloads/NZJAS-June09/23_Shome_3.pdf
 
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R

Ramps

Anybody who thinks that private enterprise would have provided free education to the bulk of the population, or free or heavily-subsidised healthcare, or brought electricity to rural Ireland, is a fantasist.
Really? How do pay people pay for food, cars, houses, holidays etc etc? Have those things become more or less expensive (relative to income)?
 

Mad as Fish

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Really? How do pay people pay for food, cars, houses, holidays etc etc? Have those things become more or less expensive (relative to income)?
Well private enterprise certainly hasn't brought broadband to the rural masses in any meaningful way..
 
R

Ramps

The internet and the World Wide Web, both of which have enabled trillions in private business activity, are both largely creations of government.

Given the scale of the profits being made from the internet, and the scale of the bailouts of banks and other businesses (including past bailouts), not to mention the benefits to business from government spending on the sectors you mention, I think it's certain that the overall effect of government spending has been positive for private business and the ability of capitalist enterprise to operate.

Anybody who thinks that private enterprise would have provided free education to the bulk of the population, or free or heavily-subsidised healthcare, or brought electricity to rural Ireland, is a fantasist.

People often mention Singapore as a model capitalist society. What they usually fail to mention is the degree of state involvement in business in Singapore:



Singapore Economy: Facts, Data, & Analysis on Economic Freedom



http://www.nzasia.org.nz/downloads/NZJAS-June09/23_Shome_3.pdf

How much of Singapore's GDP does its govt. control?
 

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