Last week I expressed my frustration that the recovery has been hampered by budget cutting for over a year. The Gravel Kraken responded with an Econ 101 lesson on GDP to highlight the fact that GDP is just a number and what matters are actual economic outcomes, not just that someone spent more money this quarter:
If the number was the most important thing to look at, and it really made all the difference, our government would just borrow a whole bunch of money, spend it, thereby increasing GDP (even if they spend it digging a hole and refilling it), and therefore ending a recession! So, as a rule, budget cuts only “slow” the “economy” on paper. In truth, the only thing the government can do with money that everybody else can’t is spend confident it will never run out. The only tool a government has to end a recession is sheer willpower, projecting an illusion long enough for people to develop confidence of their own and actually do productive things.
In an economy constrained by a lack of demand, which ours most certainly is, and given that real interest rates are currently negative, I think that borrowing a whole bunch of money and spending it is exactly what the government needs to do! Now spending on digging and refilling a hole is of course silly, but we just so happen to have an infrastructure in vast need of repair, and we have a bunch of unemployed people sitting around not doing much. We could pay them to dig and refill a hole, but that’s not very useful. Repairing critical infrastructure is.
As for the “rule” that budget cuts only slow the economy on paper, that’s just ridiculous. Lets say that 11 million people get laid off from the private sector this year. That would mean 11 million people would stop (or slow down significantly) buying things. It would mean 11 million fewer customers at businesses. It would mean a lot of businesses shutting down, along with the companies whose core business was supplying them. Now lets say that those 11 million lucky duckies were federal employees, and they get laid off because Paul Ryan eliminated their jobs as part of “deficit reduction” measures, also known as budget cuts. The effect would be exactly the same, 11 million fewer customers at businesses, etc. Of course those newly jobless folks can take solace in the fact that their loss was only on paper. Perhaps they can eat the paper for dinner! It seems like this is some machination of the idea that government employees are not real people when it comes to the economy. But of course they are. They sit at real desks with real computers and they use real office supplies, all of which were purchased from companies in the private sector, produced using raw materials supplied by other companies, and shipped by guys in trucks working for still other companies. On their lunch breaks they go to real restaurants and on their way home they stop at real stores or go to real bars for happy hour. In other words, the government, and government employees, participate in the economy. If they have less money, they will not participate as much. That results in a weakened economy.
The Gravel Kraken also said this:
While the government has the capacity to add value, the fact that it spends money is little evidence of value added. All voluntary private transactions represent value by definition because both parties saw it fit to proceed with the transaction and benefited. When government spends there is only one voluntary party, so we do not have the assurance that there is actually value. Also, government needs to spend money in areas that do not translate directly into production. If the government doubles spending on its police, all of that spending is added to GDP, but does that make people better off? It could, but it doesn’t have to. If your town, tomorrow, doubled its police force, it would boost its GDP. Has your economy improved? I would be suspicious.
I agree that the government simply spending money is no guarantee of value. For example, government spending money on keeping capital gains taxes low is far less valuable to the country than spending it on critical infrastructure. I’m not entirely sure what it means that when government spends there is only one voluntary party. If the government wants to contract Lockheed Martin to build a bunch of jet fighters, Lockheed Martin could turn down the contract. They do not, because building a bunch of jet fighters is a lucrative enterprise. Similarly, if the government wants to hire you to inspect pharmaceutical plants or look out for tax evaders, you have every right to not take the job. Each of these is a voluntary transaction. The government needs or wants to do something, they are willing to spend the money required to do that thing, and you and your good buddies at Lockheed Martin are willing to take their money.
And by the way, I would be ecstatic if my town doubled its police force tomorrow. I am confident that doing so would be economically beneficial.
520 Chestnut 
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