Saturday, December 22, 2012

Goverment Spending Does Not Equal Economic Expansion

I have written a couple of pieces recently arguing this very thing. In yesterday's daily article on, Robert Higgs makes the same case.

In "Government Bloat is Not Real Growth," Higgs explains why a real GDP statistic that is inflated with the vapor of government spending will be misleading at best. He explains why government spending should not be included in a statistic that serves ostensibly as a measure of national output. Higgs then goes on to provide statistical evidence that our social economy is not better shape that it was four years ago. As government spending becomes a more important driver of GDP, national income accounting becomes an even less proxy for economic activity.

Higgs sums up thusly,

Perhaps the most positive statement we can make about the private economy’s performance during this twelve-year period is that it has been somewhat better than complete stagnation. But private product has lost ground relative to total official GDP. Moreover, many of the measures taken to deal with the contraction—the government’s huge run-up in its spending and debt; the Fed’s great expansion of bank reserves, its allocation of credit directly to failing companies and struggling sectors, and its accommodation of the federal government’s gigantic deficits; and the government’s enactment of extremely unsettling regulatory statutes, especially Obamacare and the Dodd-Frank Act—have served to discourage the private investment needed to hasten the recovery and lay the foundation for more rapid economic growth in the long run. To find a similar perfect storm of counter-productive government fiscal, monetary, and regulatory policies, we must go back to the 1930s, when the measures taken under Herbert Hoover and Franklin D. Roosevelt turned what probably would have been an ordinary, short-lived recession into the Great Depression. If the government and the Fed persist in the kind of destructive policies they have undertaken since 2007, the potential for another great depression will remain. Even without such a catastrophe, the U.S. economy presents at best the prospect of weak performance for many years to come.

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