Government Spending
Throughout the past years, incremental emphasis has been placed on the private sector of the economy, basically materialized in private investors who use their personal resources to generate profits, but in the process also sustain economic growth and development for the overall community and country. In this context however, a question that is being placed refers to the role of the government in economic growth. Otherwise put, does federal spending impact the economy, and if so, is the impact a positive or a negative one? The aim of this paper is to conduct a research analysis that will answer the posed question. In order to reach this desiderate however, it is first necessary to assess the provenience of governmental money and the elements at the basis of economic prosperity. The paper will come to an end with a section on concluding remarks.
Origin of Federal Money
The governmental funds are generally retrieved from taxes imposed onto the population and the business community within one country. Among some examples of such taxes are the taxes for organizational profits or the VAT — the value added tax paid by all consumers and included in the retail prices of all products and services. Otherwise put, the federal money come from the people, the population of a respective country. The amount of money to be collected and the tax rates are subject to national regulations, meaning that each state imposes its own fiscal policies.
The question on the provenience of federal money has become even more accentuated within the United States as, during these times of financial hardship, the authorities continually offer economic agents funds to help them avoid bankruptcy. This scenario may then where these billions and billions of dollars come from. Economist Paul Solman strives to answer the question by looking at the two pivotal elements of the United States monetary system — the Federal Reserve and the Treasury Department. The first of these institutions is in charge of the creation of money, an activity which is divided into two sets — the first sees the actual creation of paper money and coins, and the second sees the creation of virtual money, “digital promises, computer blips, not cash, but just as good, no different than the money in your checking account” (Solman). The third means by which the Federal Reserve creates money is that of borrowing foreign capitals. The Department of the Treasury is the institution in charge of borrowing the money and distributing it in accordance with national needs.
3. Governmental Spending
The money collected by the federal authority has multiple destinations, one of them being presented above — bailing out companies in difficulty in these times of an internationalized financial crisis. The endeavor has been organized under the generic name of Troubled Asset Relief Program (TARP), “a for the establishment and management of a Treasury fund, in an attempt to curb the ongoing financial crisis of 2007-2008. The TARP gives the U.S. Treasury purchasing power of $700 billion to buy up mortgage backed securities (MBS) from institutions across the country, in an attempt to create liquidity and un-seize the money markets” (Investopedia).
The TARP is only one example of how federal money is being spent and this is only valid given the globalized financial crisis. In more balanced stages of the economy, the funds are generally distributed across various public sectors, such as education, healthcare, roads and infrastructure, transportation and so on. In the United States, a major characteristic was set by the previous presidential administration headed by George W. Bush, during whose presidency, a war was commenced on terrorism. Most of the federal funds were directed to the military in the detriment of other public sectors. Additionally, the federal debt increased to a record value of $11.61 trillion, an estimated debt of $37.881 per every U.S. citizen (U.S. National Debt Clock). Given this situation, it becomes obvious that aside financing the public sector and bailing out corporations, another destination of the governmental funds is constituted by the reimbursement of the foreign capital previously borrowed.
4. Impact of Governmental Spending
In order to best assess the impact of government spending onto the economy, it is best to commence in the same idea as the previous section. In such, today for instance, many funds from the government are directed under the TARP to large organizations, American icons which are facing the risk of bankruptcy. The automobile industry offers the most relevant example in this sense, with giants General Motors and Chrysler being the recipients of governmental funds under the Troubled Asset Relief Program; Ford has argued that it possesses sufficient liquidities and does not intent go receive money from the government. The impact of this endeavor has been a positive one onto the two automobile manufacturers and the overall economy from at least three standpoints:
Two American icons were saved from bankruptcy, salvaging as such their international reputation and place within the global market
Thousands of U.S. jobs in the automobile industry were saved, meaning that the financial safety of the GM and Chrysler employees is sustainable and will not fall on the hands of the state; additionally, the unemployment rate is not negatively affected
Thousands of jobs in other departments and in other companies and industries were saved, such as research and development, sales and logistics organizations and so on Still, despite these benefits, the Troubled Asset Relief Program has also been subjected to criticism due to the negative impacts it generates upon other sectors of the economy. And the most relevant example in this sense is given by creditors and investors. These categories are no longer able to profitably purchase stocks and grant profitable loans to the two automobile monoliths, meaning then that government spending negatively impacts the financing function of the economy.
Still, the government spends its money in more directions that the billing out of corporations in the face of bankruptcy. And it is this other spending that generates more effects. The primary role of the government is that of creating a safe environment for the overall population as well as the business community. In this order of ideas, by creating education opportunities for various occupations, by developing and implementing legislation to safeguard the principles of a free market and by ensuring the safety and well-being of all individuals, the federal spending contributes to economic prosperity. Yet, when the involvement exceeds these limits, the impacts could be negative. “To , government must expend resources to enforce contracts, provide national security, and protect against criminals. , above this minimal level, have a diminishing effect on the growth of the economy. At some level of spending, the impact of government expenditures on the production of goods and services is negative. Excessive government spending makes everybody poorer” (Garfield).
Daniel J. Mitchell is one of the disclaimers of governmental spending and he argues that the more the government spends, the more damaging the effects are upon the economy. The author of The Impact of Government Spending on Economic Growth bases his argument of negative impacts on the occurrence of following disadvantages (costs):
Extraction cost — in order to spend the money, governments must first get it from other sources, meaning that there is an adverse consequence for each federal dollar spent
Displacement cost — the resources are controlled, the private sector is stifled and real and sustainable economic growth is impeded
Negative multiplier cost — government spending supports intervention and increased costs for agencies that do not produce anything
Behavioral subsidy cost — government spending motivates people to maintain the status quo and not evolve (the unemployed will remain unemployed to continually live of welfare); subsidies are granted to economically undesirable sectors that would not survive otherwise
Behavioral penalty cost — government spending can be perceived as punishment as it discourages investments in economically desirable sectors and also discourages saving
Market distortion cost — materialized in that governmental spending impedes the efficient allocation of resources
Inefficiency cost — the government does indeed provide public services, but studies have shown that the costs of offering these services are increased and inefficient; additionally, the private sector would be able to offer the same services at superior qualities and with lower expenditures
Stagnation cost — private organizations strive to innovate and progress, while public interest in this field is barely existent (Mitchell).
5. Conclusions
Despite the growing role of the private sector, fact remains that the government remains the engine that gets the economy running. In this context then, a question is being posed relative to the impact of government spending on the overall state of the economy. In order to answer this question, it is first necessary to reveal the source of governmental money — this is generated from three sources: creation of money through printing and virtual money, taxes and foreign capital. Similarly, it is also being spent on three concomitant directions — reimbursement of the loans, billing out corporations in the face of bankruptcy and supporting the public sector (healthcare, security, education, infrastructure and so on).
The impact of government spending onto the overall economy is a highly debated topic, with some arguing the advantages, whilst others pointing out the limitations. A most relevant example of positive effects is given by the recent implementation of the Troubled Asset Relief Program, which has had the benefit of salvaging numerous American icons. Nonetheless, this situation was an extraordinary one and other specialists argue that in times of normal economic state, the impacts of government spending are among the most negative ones on the long run. Some of these harmful effects refer to increased costs and poor quality of public services, an inefficient allocation of resources, lack of motivation and innovation and so on. The pivotal role of government spending is then that of ensuring peace and stability and creating a climate that fosters economic growth. The actual involvement should however be minimal.
References:
Garfield, R., Government Spending and Economic Growth, Joint Economic Committee, http://www.house.gov/jec/fiscal/budget/spending/spending.htm last accessed on July 21, 2009
Mitchell, D.J., The Impact of Government Spending on Economic Growth, March 31, 2005, Backgrounder, Published by the Heritage Foundation
Solman, P., When the Government Writes Checks, Where Does the Money Come From? PBS, 2009, http://www.pbs.org/newshour/bb/business/jan-june09/solman_03-17.html last accessed on July 21, 2009
Troubled Asset Relief Program — TARP, Investopedia, 2009, http://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp last accessed on July 21, 2009
U.S. National Debt Clock, 2009, http://www.brillig.com/debt_clock / last accessed on July 21, 2009
