Does Reducing Unemployment through Government Spending Boost the Economy?
Lessons about inflation and wealth transfers
Does Reducing Unemployment through Government Spending Boost the Economy?
“The standard Keynesian play is to increase government spending in order to reduce unemployment and increase economic growth. Here's why it consistently fails.”
“Some experts hold that the key to economic growth is to strengthen the labor market, which is based on the view that because of the reduction in the number of unemployed workers, more individuals can afford to increase spending. As a result, economic growth follows suit.
[READ THE FOLLOWING PARAGRAPH CAREFULLY. - JRD]
The Expanding Pool of Savings—Not Declining Unemployment—Is the Key for Economic Growth”
“Since government does not generate wealth, it would have to divert savings from the wealth generators to various individuals employed in these programs to fund employment programs. This wealth diversion is financed by taxes and levies or by monetary creation.
A policy of wealth diversion depletes the pool of savings. This, in turn, weakens the process of wealth generation and then undermines prospects for real economic growth.”
“Monetary pumping by the central bank that is supposedly aimed at helping workers improve their living standards achieves the exact opposite, as loose monetary policy undermines the pool of savings. This in turn weakens the wealth generators’ ability to enhance and improve the infrastructure. As a result, workers productivity comes under pressure and their ability to command higher wages weakens. Additionally, loose monetary policy after a time lag lifts the prices of goods and services, further eroding the earnings purchasing power of workers.” [Inflation reduces the purchasing power of the dollar to those who are not first recipients to newly-created currency and credit. - JRD]
“Again, contrary to Krugman and others, funding is not about money as such but about savings, which is the amount of consumer goods produced less the consumption of these goods by the owners of these goods.
To maintain their life and well-being, people require final consumer goods and services, not money as such, which is just a medium of exchange. Money only helps to facilitate trade among producers—it does not directly generate any real goods.
Contradicting Krugman and others, the artificial generation of employment such as digging ditches is not cost-free. Various individuals employed in non-wealth-generating projects must be paid. Since government does not produce any 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., savings from wealth generators. This, however, weakens the process of wealth generation.