Few things are more fundamental to economic understanding than the basic truth that government has no resources. While wise minds can debate the good or bad of a lot or a little of government, no sentient being would ever suggest that government is self-sustaining.
Government is always and everywhere an effect of the private sector. Put more clearly, government only has spending power insofar as it extracts it from the private sector.
By extension, government can’t introduce any new demand. Economists of the Keynesian persuasion have long believed otherwise, that government spending is an economic stimulant. But it’s not. The private sector produces, government taxes, and government’s redistribution of the wealth taxed is solely a shifting of demand from one set of hands to another set.
Crucial about what’s been written is that economic giants like the late Robert Bartley (longtime editorial page editor at the Wall Street Journal) spent many decades hammering the truth about the source of all demand home. It always follows supply created in the private sector. What we supply represents our demand. Bartley et al revived Say’s Law in the 1980s, and for that we should be grateful.
Unfortunately in the 2020s, politics has gotten in the way of basic economics. This truth can be found in the aftermath of last week’s Gross Domestic Product (GDP) release. The Q3 calculation came in at 4.9%, thus cheering those who don’t know any better that the economy is booming. About the economy’s health, the view here is that the U.S. is always booming. It’s just a question of how much. In which case GDP is a lousy measure.
That it is can be found in the 4.9% calculation. 26 percent of the 4.9% calculation was a function of government spending. Which requires a pause, and possibly a re-read of what’s written above. A re-read of the above paragraphs will hopefully elicit a singular response to the empirical reality that 26 percent of the reported growth of GDP is government spending. The only answer to this has to be that “government cannot stimulate ANY economic growth.” How could it? Government can only spend insofar as growth has already taken place. Government has no resources, period. To say that government spending adds to economic growth is to double count.
From there, the economic loss from government spending can be briefly pointed out. There’s no progress without matching talent with capital, so stop and think what the economy loses as a consequence of government operating as such a substantial consumer of precious resources. Hopefully it causes readers to conclude that “government spending is an economic somnolent” in addition to the fact that “government cannot stimulate ANY economic growth.”
Bringing the Republicans into the picture, the quoted words should have been the response of pundits and economists who caucus with the GOP. The response should have been that “Government has no resources other than what it extracts, which means the 4.9% GDP growth number is highly misleading for it incorporating the consumption of the fruits of wealth that was first produced in the private sector. GDP is ultimately a measure of demand, but government has none. It can only demand or redistribute the latter insofar as those in the productive private sector have less.”
Well yes, the reply would have been a logical one. Except that Republicans can’t use it now because they’ve spent nearly every day, week, and month of the Biden presidency making a case that the wasteful spending Biden signed into law (mimicking his Republican predecessor) amounted to “excess demand” that was pushing up prices. No, only production can’t boost demand. Nothing else. Government waste didn’t increase demand, rather it just altered who was demanding. Basic stuff that people like Bartley made understandable back in the 1980s.
Sadly, Republicans including Judy Shelton and Phil Gramm have run from supply side truths in favor of Keynesian folly. According to 2021-present Republicans, government can extract trillions to redistribute without those redistributed from losing any consumptive ability. It’s as though the Reagan ‘80s didn’t happen as wise Republicans claim that government is some kind of other in terms of what it hands out to the citizenry. Double counting a la GDP.
Which is presumably why Republicans have had no answer to the 4.9% falsehood. To answer it correctly, would be for Republicans to run from their “inflation” argument made throughout the Biden presidency. One can only conclude that they’ve chosen to ignore the flaw in the GDP number in order to continue to play politics with “inflation.”
Republished from RealClear Markets
