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Government Spending in Relation to Economic Growth

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Taylor Smith

on 23 April 2010

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Transcript of Government Spending in Relation to Economic Growth

Government Spending in Relation to
Economic Growth "Economic Stimulus" Taxes Tax Cuts The Statistical Evidence "... government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs." - Economist John Maynard Keynes "If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created to jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off." - Macroeconomist N. Gregory Mankiw Theory Reality The idea is for government to replace demand that would normally come from consumers with demand from the government. But when the government provides arbitrary demand, it may be for goods or services that would not benefit, and may in fact harm the economy in the long run. "[If government spending] takes the form of bridges to nowhere, a result could be economic expnsion as measured by standard statistics but little increase in economic well-being." - Macroeconomist N. Gregory Mankiw Every dollar spent has to come from somewhere, usually from taxes. Taxes lower the incentive to work; why work or start a new business if the government just takes the profits? An alternative to government spending would be lower tax rates. "a dollar devoted to a tax cut could be spent but it could also be saved, so bigger bang for the buck with a spending program..." - Journalist Betsy Stark There are two problems with this statement:
1. the "bang" for the buck is less than some make it seem
2. makes incorrect assumption that "savers are people who store all of their money outside of the economy in places such as their mattresses" - Columnist Anthony Falluco Theory Reality A person who saves a dollar usually deposits it in a bank or invests it. Despite all of this, policymakers continue bolstering government spending, and many people continue supporting them, claiming that the costs outweigh the benefits. Is all of that government spending really worth it? Per capita economic output in the U.S. in 2003 was $37,600-more than 40 percent higher than the $26,600 average for EU-15 nations Real economic growth in the U.S. over the past 10 years (3.2 percent average annual growth) has been more than 50 percent faster than EU-15 growth during the same period The U.S. unemployment rate is significantly lower than the EU-15 unemployment rate, and there is a stunning gap in the percentage of unemployed who have been without a job for more than 12 months-11.8 percent in the U.S. versus 41.9 percent in EU-15 nations Living standards in the EU are equivalent to living standards in the poorest American states-roughly equal to Arkansas and Montana and only slightly ahead of West Virginia and Mississippi, the two poorest states
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