Wednesday, August 1, 2012

That's only half the story

President Obama was campaigning in Ohio today and made a very clear statement of how he believes the economy works:
President Obama explained to a group of supporters in Ohio this afternoon that more government investments in infrastructure would help the economy grow again. Pointing out that if government continued to invest in roads and bridges, it would put more money in people’s pockets to spend.
“That’s how we grow our economy.” Obama said, “If we’re investing in roads and bridges, putting some hard hats back to work, getting our steel workers back to work, they got some more money to spend, maybe they buy a new computer, maybe they decide to take a little vacation.”
“And all that money circulates in the economy and it makes us all grow,” Obama added.
That's not a bad description of the mechanics of how government spending is alleged to lead to growth.  However, it misses the other half of the story.  To pay for that government spending, people have to be taxed now, or the government has to borrow now and raise taxes in the future.  If taxes are collected now, then people will have less money to spend, maybe they put off buying a new computer, maybe the decide that they can't afford a little vacation.  If the government borrows money, it sucks funds out of financial markets that would have gone to the private sector.  Plus, because this money has to be paid back, people know that their taxes will be raised in the future, so they reduce their spending now.

Is that really how we grow our economy, by taking money from consumers and private businesses to build roads and bridges?  If that's so, then let's take all of the wealth in the economy and pay people to dig holes in the ground and then fill them in.  What fantastic growth that would cause!