Most “economists” never mention the second source of money when they fear monger about government debt and deficits. One particularly nonsense post at http://www.learnliberty.org states that when Governments cut spending, economic activity goes up. He cites a couple of examples, probably because there aren’t any others. Meanwhile, what he doesn’t consider is why one or two instances of governments cutting spending might have “worked”. Well, here’s when it can “work:
1) the private sector took on debt like Clinton’s surpluses when private debt started to skyrocket.
2) saved money was spent – as in the case of soldiers coming home
3) money re-directed from unproductive to productive uses (from tanks to cars, from war planes to well, anything at home).
Note that #2 and #3 happen when wars end. The “economist” used the example of U.S. cutting government spending but economic activity going up after the war. Well, doh!!!! The U.S. was spending enormous sums on largely wasteful things. Killing people isn’t good for anyone’s economy. When that money was re-directed back home, and a lot of it was cut, you got #2 and #3 in spades. Plus, the private sector started taking on debt again, so in his example he also had #1 going on as well.
Meanwhile, the UK is proving right now that a Gov cutting spending when none of the above 3 things are happening leads to recession/depression. Spain, Ireland and Greece are also finding out just how awful austerity is for an economy. The debt and deficits of these governments actually go up even as they reduce spending. Why? Because they take in far less in taxes with everyone out of work.
Most “free market” monetarists say that governments always spend wastefully – but it was not the gov that built McMansions, and bought 2nd, 3rd and 4th homes, and speculated to high heaven in both the 1920’s and the 2000’s. The private sector is equal, if not worse, than governments in wastefulness. Government didn’t create derivatives, that was Wall Street.
Both governments and the private sector can do great good, and both can do great harm. Placing all the blame on Gov spending is ideology, not economics. Understanding that the Gov and Private Sector are like two parents who must work together should be obvious, but ever since Reagan/Thatcher we’ve come to believe that the private sector should do everything and Gov should just get out of the way. That is no different from removing every street light and stop sign and sending the traffic cops home and thinking the drivers will just figure it out.