Monday, July 2, 2012

Reductions in State and Local Government Spending is a Good Thing!

Being published by the New York Fed, Liberty Street Economics, is ironically titled. The people there argue that reductions in spending by state and local governments are holding back the economy. They use the following chart to illustrate their point that state and local goverment spending has tanked, causing a draw on the economy.

Think again, I say. While it is true that, because government spending is a component of Gross Domestic Product, when states and municipalities spend less, GDP could decrease, in the long run, less government spending is a good thing, provided we wish to return to prosperity.

The government does not produce anything. Its income must be taxed from it citizens. As such, government spending is consumption. The more we consume as a society, the less we save and invest. With less investment comes lower per capita capital over time and less prosperity. Do not be led astray by GDP. The less government spending, the better.

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