Friday, December 17, 2010

Chart of the day

When the government announces new spending initiatives -- "investments" in the parlance of big government supporters -- it is useful to remember that each dollar spent by the government is one less dollar available to the private sector. After all, every dollar spent must first be withdrawn from the economy either through taxation or borrowing, leaving fewer resources for the private sector to make use of.  In econospeak the phenomenon is known as "crowding out," but is widely thought to occur only when the economy is at full employment.

Mark Calabria, however, notes the following chart:

As purchases of government securities increases due to borrowing, loans to the private sector decline. This graph would appear to support the idea that the stimulus package was bound to fail, because it first withdrew money from the economy via borrowing before re-injecting it through government spending.


Cash212 said...

You have it mixed up: the government spends first and then borrows. They can actually run a deficit without sterilizing thus stealthily taxing it's citizens via inflation. This is an unfortunate fact and is the basis for the dangerous economic school knows as Chartalism or Modern Monetary theory. Many in this school argue that since govt spending is not constrained the govt, in its infinite wisdom, should assure full employment (how and in what industries they don't expand on).

Colin said...

Good point.

vince said...

no, as Krugman said the stimulus just wasnt' big enough