Everyone is familiar with the tale told to us in High School about when you spend money on groceries, the grocer then has money to buy shoes. And now the government tells us that for every $100 dollars they spend, they can create $150 in GDP growth. But where do the resources to make groceries and shoes and anything else the government buys come from? Isn’t it fascinating that this popular economic fable ignores the most important part of the economy, production?
Before you can consume, you must produce. If you want to eat pie, you must first make a pie, and if you eat the pie, you have to make another one if you want more. But lets say you were going to only eat half the pie, and spend the rest of the day knitting a sweater. Then the government comes and says to “help the economy” they are going to buy the rest of your pie. Now you get to stay up late, laboring more, to have pie and a sweater tomorrow.
It doesn’t help that you may have money from the pie purchase to spend on another half of pie. That simply transfers to labor to someone else and includes more people in the analogy. Regardless of the number of people, if they consume more, they have to produce more. Anytime you hear someone use the phrase “multiplier effect”, they mean “crack the whip and tell the people to work more/harder.”
That may make the GDP numbers look better, but it isn’t economic growth. An economy can produce an assortment of outcomes, and free time is one of them. Trading free time for pie, doesn’t give you more economic outcomes, it’s a trade. And in the case of government spending, you are trading your labor so that government can consume more of your economic pie. You work harder, for less.
Economic growth occurs when you create a pie making device that allows you to make two pies with the time and effort that you used to make only one. To make such a device you will have to collect resources, NOT consume them, instead SAVE THEM, and INVEST them in the creation of the pie making device.
Any induced spending consumes resources that people would have saved. It consumes the time and resources that could have gone to create a pie maker. It consumes the rope that fishermen were going to use to make nets. It literally kills the golden goose in attempt to get at all the eggs.