Government outlays and economic growth

By Dr Frank Shostak

A key factor that constrains people’s ability to generate goods and services is the scarcity of funding. Contrary to popular thinking, funding is not about money as such but about real savings. 

Note that various tools and machinery or the infrastructure that individuals have created is for only one purpose and it is to be able to produce consumer goods that are required to maintain and promote individuals’ life and well-being. 

For a given consumption of consumer goods, the greater the production of these goods the larger the pool of real funding or savings is going to be. The quantity and the quality of various tools and machinery i.e. the available infrastructure, place a limit on the quantity and the quality of the production of consumer goods. 

Through the introduction of better tools and machinery a greater output can be secured. The increase in tools and machinery and their enhancement requires funding to support various individuals that are engaged in the production of new tools and machinery and the maintenance of the existing infrastructure. 

This of course means that through the increase in real savings, a better infrastructure can be built and this in turn sets the platform for a higher economic growth. 

A higher economic growth means a larger quantity of consumer goods, which in turn permits more real savings and also more consumption. With more real savings a more advanced infrastructure can be created and this in turn sets the platform for a further strengthening in the economic growth.

Note that the savers here are wealth generators. It is wealth generators that save and employ their real savings in the buildup of the infrastructure. The savings of wealth generators employed to fund various individuals that are specialized in the making and the maintenance of the infrastructure. Real savings also fund individuals that are engaged in the production of consumer goods.

Since government doesn’t produce any real wealth obviously it cannot save and therefore it cannot fund any activity. Hence for the government to engage in various activities it must divert funding i.e. real savings from wealth generators. 

As a rule, such activities amount to providing support to various non-productive activities that add nothing to the pool of real funding – for instance, providing a large amount of money to various non-productive activities in order to protect employment. 

Since government activities in essence only consume and do not generate real savings obviously, government cannot grow an economy. An increase in government spending then means the weakening of wealth generators and thus weakening and not strengthening the economic growth as popular thinking and various empirical studies show. 

How then are we to reconcile the so-called facts that are supposedly presented by various econometric studies i.e. that government can grow the economy? 

Contrary to popular way of thinking data cannot talk by itself and present so-called facts. The data must be assessed by means of a framework that can withstand some basic scrutiny such as whether the government whilst not being a wealth generator can grow the economy. 

Once we reach the conclusion that the government cannot grow the economy, we can emphatically reject various econometric studies that tell us the exact opposite. It must be realized that the data out of which various so called “facts” are produced appear to be supportive of various empirical research conclusions as long as the private sector of the economy generates enough real savings to support productive and non-productive activities. 

As long as this is the case various econometric data torturing techniques can produce a “support” for any pie in the sky theory such as that the government can grow an economy. 

The so-called empirical findings provide support for the Keynesian theory i.e. that when government spends more on goods and services this boosts the overall income in the economy by the multiple of the increase in government spending. Hence it would appear the more government spends the larger the national income is going to be. 

Observe that government cannot lift its spending without reducing the means of wealth generators. Once the ability of wealth generators to produce real savings curtailed economic growth follows suit and no amount of money that government pushes into the economy can make it grow. (Again, the government cannot generate real savings it can only divert the existing real savings from wealth generators). 

The more government spends the more resources it takes from wealth generators

As a rule, the more government spends the more resources it takes from wealth generators. This in turn undermines the wealth generating process of the economy. 

Since government outlays have to be funded it means that in addition to taxes the government has to secure some other means of funding such as borrowings or printing money, or new forms of taxes. 

An increase in government outlays raises the diversion of wealth from wealth generating activities to non-wealth generating activities. It leads to an economic impoverishment. 

So, in this sense an increase in government outlays to strengthen the overall economy’s demand should be regarded as bad news for the wealth generating process and hence for the economy. 

Various impressive projects that the government undertakes also fall into the category of wealth redistribution. The fact that the private sector did not undertake these projects raises the likelihood that these projects are on the low priority list of consumers. 

Given the state of the pool of real savings, the implementation of these projects will undermine the well-being of individuals since these projects will be introduced at the expense of goods production that are at the top on the priority list of consumers.  

Let us assume that the government decides to embark on the building of a pyramid that most individuals regard as a low priority. Individuals who will be employed on this project must be given access to various goods and services to sustain their life and well-beings. Consequently, the government would have to impose taxes on wealth generators in order to support the building of the pyramid. 

Government taxes stifle the market process

Whenever wealth producers exchange their products with each other, the exchange is voluntary. Producers exchange goods in their possession for goods that they expect will benefit them more. 

The crux is that the exchange or the trade must be free and thus reflective of individual’s priorities. Government taxes are, however, of a coercive nature: they force producers to part with their real savings in an exchange for a low priority goods. This implies that producers are forced to exchange more for less, and obviously this impairs their well-being. 

The more of non-market related projects government undertakes – the more real savings is taken away from wealth producers. Note that the level of tax i.e., real savings, taken from wealth producers is determined by the size of government activities. 

The essence of what was said is not altered by the introduction of money. In the money economy the government will tax (take money from wealth generators) and pay out the received money to various individuals that are employed directly or indirectly by the government. 

The money will give these individuals access to the pool of real savings. Government-employed individuals are now able to exchange the taxed money for various consumer goods and services that are required to maintain and improve their lives and well-beings. 

Government can force non-market chosen projects it cannot make these projects economically viable

The government can force various non-market chosen projects. The government, however, cannot make these projects economically viable. As time goes by the burden that these projects will impose on the economy through higher ongoing levels of taxes is going to undermine the well-being of individuals and will make these projects even more of a burden.

What about the lowering of taxes on businesses – surely this will give a boost to capital investment and strengthen the process of real wealth formation? As long as this tax lowering is not matched by a reduction in government spending this will encourage a misallocation of real savings.  Real savings are going to be channelled to investments that in a framework of a lower government outlays would not be undertaken.

Conclusion

What undermines the economic growth is the size of government outlays. The larger the government outlays are the worse it is for the real economic growth.

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