Spending is not wealth-creation

Spending Isn’t Production por Robert Murphy:

.. it’s obvious that spending per se isn’t the source of economic benefits. It’s easy to spend. If that were really the only thing holding back economies in recession, then one wonders why humans still suffer from recessions, in so many countries and so repeatedly throughout history.

No, the real difficulty in economic life is production, in turning scarce resources into goods and services that the consumers value. This takes judgment on the part of entrepreneurs directing the process, and it takes hard work from their employees.

.. it hardly follows that government spending is all we need right now to “boost the economy.” On the contrary, government spending simply siphons real resources away from the private sector and into politically-chosen channels, where they will be used in inefficient ways.

So if Krugman’s conclusion is wrong, where did he misstep in his argument? The problem is that he confused the thermometer with the fever .. the conventional Gross Domestic Product (GDP) statistic.

.. the one thing that makes the GDP calculation at least remotely defensible—is that much of the spending is voluntary ..

In contrast, if the government spends the same number of dollars, there is no reason to suppose that genuine “economic output” has gone up by the same amount .. suppose the government spends the money paying workers to dig ditches and then fill them back up. Clearly, in this scenario there would be nothing to show for the government expenditure.

In fact, the economy as a whole would be poorer ..

Paul Krugman and other Keynesians can come up with bizarre theories explaining why paying workers to dig ditches actually can make society richer .. Krugman .. committed the basic blunder of mistaking a rise in the GDP statistic with a genuine increase in human well-being. Under normal circumstances, the two are related, and this is why we might carelessly view rising GDP as “good for the economy.” But to artificially goose the figure through government spending is to confuse a mere symptom for the real thing.