Chris Edwards: Government Spending Up, Private GDP Down

It drives a lot of us at Cato nuts to read news stories almost every day which simply assume that government spending is good for the economy. Any defense or nondefense spending restraint will hurt economic growth, it is assumed.

Chris has a nice chart. Here.

There is another reason government spending does not provide a durable, long-term economic recovery. The “equation” spending proponents use is actually an accounting identity:

GDP = consumption + investment + (government spending) + (exports − imports)

An accounting identity “is an equality that must be true regardless of the value of its variables, or a statement that by definition (or construction) must be true.”

There is no net gain from government spending because an increase in government spending must be offset by a decrease in one or more of the other variables on the right side of the equal sign.


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