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Sunday, November 16, 2008

Why Increased Government Spending is NOT the Way Out of Recession

The much dis-credited theories of "economist" John Maynard Keynes are back.

As the global economic meltdown continues, governments from China, to the USA and New Zealand are fighting back with increased government spending.

Much of this is on major infrastructure projects, but some is purely spending to "get the economy moving."

Why is this dumb? Why will it only serve to deepen and extend the economic downturn?

The answer is simple. We are in the mess we are now because governments have interfered in markets for years, distorting pricing signals and creating a culture of hugely inefficient investment decisions.

Though many "economists" will disagree national finances are no different in principle from household finances.

When a household comes under financial pressure, the correct response is to both cut expenditure and improve the quality of what spending remains.

Frivolous spending should be eliminated and all possible spare money should be saved. Households don't try to spend their way out of recession. They make better spending/investment decisions so they may recover as quickly as possible.

Governments should act likewise.

Increased government spending must be paid for either by deficit spending which dilutes the value of the currency (inflation)or by raising taxes.

Inflation stunts growth by creating uncertainty and thereby discouraging investment. Higher taxes retard recovery by removing the incentive to risk money through investment.

Higher government spending will stimulate the economy for short time, but by insulating poor investors from the consequences of their folly, only serves to pro-long the culture that caused the problems in the first place.

By cutting government spending and lowering taxation, more money will flow to those who know how best to invest it-you and me.

Some of that cash will be spent on essentials, food, housing, education etc. The difference being that individuals will spend it carefully and wisely.

Any surplus will be saved. This horrifies the "pseudo economists" who seem to think this money will be lost to the economy by being buried in the garden or stashed under mattresses.

A very small proportion may be, but the rest will be invested in the safest financial institutions available-banks, or very well managed finance companies.

This money will then be very judiciously loaned out as mortgages or to very sound and secure businesses.

Thus any spare money will not be wastefully spent on government "pump priming", but will be carefully invested to maximum advantage of all.

Govenments spend cash to secure votes or appease special interests.

Individuals spend money to get a return.

Which approach is more likely to get a sluggish economy moving again?


Anonymous Anonymous said...

"...very well managed finance companies.

"This money will then be very judiciously loaned out as mortgages or to very sound and secure businesses."

Haven't been reading the newspapers for the last few months then, Trev?

Sam Buchanan

4:24 PM  

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