Government Spending Does Not Boost the Economy!

Some people believe that governments can boost the economy by spending money, but they are forgetting one thing:  governments must take before they can give!  Governments obtain their money from two, or possibly three, sources:

  1. Taxes, fees, and fines.  This includes licensing fees, as well as direct and indirect taxes and penalties levied for breaking the laws—all of which reduce the money that can be used by businesses and individuals for productive pursuits.  In other words, the money taken from the economy by governments reduces, and thus depresses, the economy!  (In the United States, the total Federal government revenue for 2012 is estimated to be $2.5 trillion, with a deficit of $1.33 trillion).  In other words, the revenue generated by taxes, fees, and fines is not enough to sustain the U.S. government—there is still a deficit.  It must either take more out of the economy (depressing it further), or it must cover its expenses with borrowed funds. 
  2. Borrowed funds. Until recently, governments had better credit ratings than most corporations and individuals, and could borrow funds more cheaply than most businesses and individuals, thus crowding them out of the capital markets and raising the cost of capital for everyone.  Raising the cost of capital does not boost the economy.  When governments borrow funds at, say, 3% and give it to unemployed people, welfare recipients, Medicare and Medicaid beneficiaries, foreign governments, or bail out uncompetitive banks and failing corporations, or pay weapons manufacturers so they can wage wars (that consume the materiel that the weapons manufacturers produce), this doesn’t boost the economy.  It makes it less productive and consumes the wealth.  And what’s worse, it just saddles future taxpayers with an ever-expanding debt to be paid off someday, or…paid off with inflated currency.
  3. Inflated currency.  Some governments have the option of printing currency; i.e., exchanging pieces of paper (required by threat of force [legal tender laws] to be accepted for all debts public and private) for valuable goods and services.  Of course, as the governments with printing presses print more currency, each currency unit becomes worth less.  In time, people are using currencies that are becoming worth less all the time.  This doesn’t boost the economy!  It only boosts certain government-favored industries or interest groups at the expense of consumer-desired goods/services.  And should the users of that currency become disenchanted with the way the currency’s purchasing power is diminishing, that economy will surely decline rapidly, causing people to decide to use a different currency, or use real money (gold and silver) or barter instead.

Bottom line:  Governments cannot boost the economy because they must take wealth out of the economy in the form of taxes, borrowed funds, or by creating cheaper and cheaper currency out of thin air. Then, they force people to accept the depreciated currency for government “priorities” which are generally, at best unproductive, and at worst, destructive.

To boost the economy, governments should protect individual property rights and reduce governmental interference in markets…just the opposite of what they are doing today.

Robert Jackson Smith

For comments, suggestions, or replies to the author, please e-mail