The Freeman's Burden:

To defend the principles of human liberty; to educate; to be vigilant against the ever expanding power of the state.

Friday, October 08, 2004

Weak Economic Growth is a Repudiation of Keynesian Theory

How on Earth can you have round after round of massive tax cuts and still have anemic economic growth? The short answer is too much government spending. As Milton Friedman explained, there are four ways people spend money. They spend their own money on themselves, here they are concerned with both value (as the purchaser) and quality (as the consumer). The second way is spending their own money on someone else, as the purchaser they are still concerned with value, but because they are not consuming the good or service they are less concerned with quality. The third way is spending others money on themselves. In this case, value matters less because they did not sacrifice to earn the funds being spent, but because they are the consumer, they care about quality. The fourth way is spending someone else's money on someone else. In this instance, neither value nor quality matters. Individuals usually spend money in the first way, government always spends money in the fourth way. Put more simply, money in private hands tends to go from less productive to more productive uses, while money in public hands tends to go from more productive to less productive uses, i.e. creates neither jobs nor wealth. Bush has tried to stimulate economic growth by increasing both private and public spending as Keynesian economists would recommend, but the results have been that the public spending has canceled the wealth modifier of private spending and failed to create the desired economic outcome. While some deficit spending is acceptable in order to increase liquidity during economic slow down, government simply cannot spend its way into prosperity.


Blogger Mark said...

I have to agree with your last line about not beign able to spend into prosperity. It makes no historical sense to tax cut and spend. . . it's just not the logical order of things, ideology has mandated that you either tax and spend, or you cut and cut. Seems pretty simple, but Bush hasn't gotten it. (I prefer the former, being a young old fashion tax-n-spend liberal)

11:54 PM  

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