Government Spending Economic Theory

Obama says the feds ‘saved’ 2 million jobs. But the cost of each job saved was as much as $65 million, according to our not-very-precise accounting.

Was it worth it?

Yesterday, we went on at some length as to why government jobs weren’t the same as private sector jobs. Since they’re never put to the test of the market, you never know whether they are worth having, let alone saving. Do they add to the sum of human wealth and happiness…or do they subtract from it? No one knows for sure.

But here’s the strange and remarkable thing; modern economists actually would prefer jobs that are NOT worth doing.

In the twisted mind of a mainstream economist the problem in a depression is that people don’t spend money. Since they don’t spend, demand goes down. The secret to avoiding a depression, they believe, is to replace private demand with government demand.

Easy, peasy…right?

The government just spends more money. And since it doesn’t have any more money to spend (practically every government on earth was already running a deficit), it borrows the necessary funds. Thus does demand go up. And thus do the feds create the next bubble – in public debt.

But what if government-funded stimulus projects actually produced goods and services that people wanted? Ah…that would be a problem. Because in a depression, there is too much supply and not enough demand. Prices fall, encouraging people to delay spending…further depressing demand…and causing an even worse depression. So, the last thing the feds want is more supply. They want more demand but LESS supply. That means that the ideal government project is one that doesn’t produce anything worth having. Such as military spending. Or digging holes and filling them up again. Or, departments and agencies that employ people who don’t do anything.

It sounds to us as though practically any government program would fill the bill!


Bill Bonner,
for The Daily Reckoning