Thursday, August 6, 2015

The economic spending fallacy

One cannot help but marvel at the pervasiveness of the misguided idea that spending is good for the economy.

The other day, for instance, an acquaintance lamented that his weekly restaurant expenses were hard on his pocket book, but he then quickly rejoined that at least his lavish dining habits boosted the economy. Such thinking is hardly uncommon. Indeed most cultural and media elite attribute upticks in economic growth to surges in spending and the opposite to reductions in spending. Presidential aspirant Bernie Sanders has gone so far as to suggest $1 trillion in public infrastructure spending over five years partly to “help the economy.”

On its face this thinking appears to make sense, but when examined it does not wash. Consider the following scenario.