Abet Chichi2

[Tuff-Stuff]

chichi, Both are WORTHY reads and cover the issue well>

What is interesting to us is that the periods when the government’s share of GDP is shrinking tend to be the better times for the economy. Some might say that, well sure, if there is a strong economy, the private sector will grow faster than the government. We believe that there is something deeper going on.

Rising government spending displaces private activity. If someone gets hired to work for the government, that means he is giving up the possibility of working in the productive sector, AKA the private sector. If a farmer grows a bushel of wheat, the wealth of the whole country will be increased by the value of that wheat. If a factory worker makes a box full of widgets, the country as a whole has its wealth increased by that many widgets.

But if a government regulator writes a new regulation, that effort does not really contribute to the wealth of the country. It might help protect the wealth of the country, by keeping some evildoer from taking someone else’s stuff, or polluting air or water. But it does not add to the “product” of the country.

This is the key point which the Keynesians miss. They argue for increased government spending during slow economic times to take up the slack, and stimulate more demand. But where is the evidence that it actually works?