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Wednesday, January 14, 2009

Government Spending Will Only Worsen Recession

I have argued before that increased government spending is NOT the way to beat recession.

US economist Dr. Tracy C. Miller agrees

From Frontpage Magazine

President-elect Obama is considering an economic stimulus package that will include increases in government spending and tax cuts of approximately one trillion dollars. Many fear a prolonged depression resulting from a sharp reduction in consumer spending.

After saving very little for many years, Americans have begun to save more in response to the economic crisis. When people spend less on consumer goods and services, producers sell less and cannot afford to employ as many workers. Thus, it seems self-evident that if unemployment is to be reduced and the economy is to recover from the recession, there must be an increase in spending. If consumers insist on saving more and reducing their spending, it is widely believed that the government should offset this decline by spending more on public works projects.

The above analysis reflects several fallacies that are common in popular discussions about economics. First is the erroneous assumption that if people save more money, total spending will decline. While this would be true if they saved money in cash and stuffed it under their mattresses; in today’s economy, almost all savings is deposited in financial institutions or used to buy stocks, bonds, or mutual funds. Financial institutions and corporations that issue stocks and bonds use that money to fund investment projects. If people save more, more can be invested, which means employment will increase in those firms producing capital goods like machines, computers, and factories. No economic stimulus package is needed because the increase in investment spending will offset the decline in consumer spending, creating new jobs producing investment goods to replace the jobs lost producing consumer goods...


ACT MP Roger Douglas is one of the few politicians to understand this point.

John Key and Bill English please take note.

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