The myth about government spending

Calls for increased government spending are heard everywhere. Some even have gone as far as to claim that fiscal spending can replace private consumption as a driver of aggregate demand. Such notions are ill-founded. It’s very simple to see why.

To the average laid-off worker hired by the government to perform a task for $20/hr, it makes no difference to him whether he is asked to build highways or simply to dig holes in the ground in the middle of a desert. In other words, the worker who gets paid doesn’t worry whether there is any demand for the product of his labor, as long as he gets paid. But in the real world, the effect would be the same as the government printing and transferring cash to those who do not produce desired products and allowing them to chase after real goods and services. Absent of adjustment to demand conditions by the private sector, the result would be bread lines and inflation.

In practice, when workers have more cash in their pockets and start to demand more real goods, businesses respond by investing in additional capacity, often accompanied by expanding payroll. That’s how temporary gov’t spending drives up private demand and restores private sector activity.

Keynesian policies provide employers of the last resort in times of economic distressed and should not be confused with long term economic vitality.  No amount of highway construction can replace the need to produce the goods and services that people really demand, which come mostly out of the private sector.

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