jessescrossroadscafe.blogspot.com / By Jesse / February 6, 2013
I think we can understand the principle of government spending as a spur to aggregate demand, which can be useful in certain circumstances where the economy has been caught in a ‘feedback loop’ of stagnancy.
I won’t go into it in detail now, but if the government buys things in the real economy, or provides money for other people to buy things in the real economy, the demand for real goods increases. Simple enough. One can argue about aftereffects, but the demand increase remains the same. And the principle is that this temporary stimulus will help the real economy break out of a crisis induced feedback loop of stagnation. And I would add a serious caveat, IF other changes have been made to those problems and policies which have caused the crisis in the first place.
This is called ‘stimulus’ in economics.
There are other instances of stimulus being applied to an otherwise healthy but sub-optimal economy, and again, I will leave that to some other discussion. Here I speak only about stimulus in the aftermath of a crisis, an economy which is marked by endemically slack demand and investment. And I do think the principle of liquidity trap has been mistaken to the extent that the symptoms are treated rather than causes. I call this cargo cult economics. And Geithner and Bernanke are its high priests.
But even in the case of post crisis slump, I wonder about this principle of stimulus in application. If the government wishes to add $1 Trillion in stimulus to a slack economy, would it be the same thing to just give $1 Billion each to the top 1000 richest people in the nation, or $10,000 each to 100 million randomly selected people, to be paid out over the period of a year.