Thursday, February 25, 2010

Crowding Out

Cartoon by Gary Varvel. (HT The New Seditionists via Russ Roberts)

1 comment:

thinking said...

It's not a zero sum game.

In severe recessions/depressions, govt spending is necessary to create jobs while the private sector recovers. Indeed, spending in the public sector creates private sector jobs.

For instance, let's say the govt builds a new highway or school. They hire private contractors to build those projects, who buy the cement, steel, etc from private sector companies, etc. All of these employees then spend their money at Walmart, etc. The multiplier effect is not somehow nullified if the govt is the one funding these projects.

The basic formula is
GDP = C + I + G + (Ex - Im)

In a severe economic downturn, C, I, and net Exports are all down, so G has to pick up the slack.

Of course, in the long run, building of highways, schools, etc are investments that further private sector commerce.

If this cartoon is true, then it also means that govt spending on the military takes away from private sector jobs, as does govt spending on police and fire departments, etc. I don't recall any cartoons about how Bush's war spending was depleting the private sector of jobs.

Spending is spending. The source makes a difference, but when it comes to creating jobs, it is a multiplier effect that is in play.