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

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    Politics.ie Member
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    Default How does government spending within the economy drag down the economy?

    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.
    When you see the words "Mises" or "Hayek" in someone's post, just ask yourself: do I really want to ban paper money and go back to gold?

    You have to pity the kind of people who buy into conspiracy theories. I find the following to be the saddest words on the internet: "Re: connection between Bilderberg puppet lady gaga and viral outbreak in ukraine "

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    Politics.ie Member sic transit's Avatar
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    Eh why don't you go first? Pretty underwhelming OP.
    "There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self." Ernest Hemingway

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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.

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    Politics.ie Member daveL's Avatar
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    Quote Originally Posted by feargach View Post
    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.

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    Politics.ie Member The System Works's Avatar
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    Quote Originally Posted by feargach View Post
    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?

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    Quote Originally Posted by feargach View Post
    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.

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    Politics.ie Member stopdoingstuff's Avatar
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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.

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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.

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    Politics.ie Member statsman's Avatar
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    Quote Originally Posted by sic transit View Post
    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/academ...%20revenue.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.
    Last edited by statsman; 10th December 2012 at 11:51 AM.
    Put a thief among honest men and they will eventually relieve him of his watch. Flann O'Brien

  10. #10

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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
    “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” - Friedrich A. Hayek

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