With the economy barely growing and the Washington crowd either arguing about what to do (the Republcans) or running away from the subject (the Democrats), it seems a good time to look at the various types of expenditures, both public and private, and see which would help the most.
The single best expenditure for economic growth it made by private investment. If a company builds a new plant or buys new equipment, the amount spent gets injected into the economy, and there will be a need for the life of the investment to hire workers to run the new facilities. That means that a one million dollar investment will increase the current GDP and it will also increase future GDP as well.
The second best expenditure is private spending for consumption. If 10,000 people each spend $100 on consumer purchases, the same million dollars gets pumped into the economy. To the extent that the items purchased are made in the USA, there is an increase in GDP for this year. The increase in business may cause some additional investment in order to produce the items purchased, so there could be some minimal future growth in GDP as well.
The third best expenditure for growth is public spending. One million dollars spent by the government has essentially the same effect as one million dollars spent by private individuals with one exception: the government has to get that one million dollars from somewhere. In other words, when the government spends, it has to take money from the private sector in order to fund the expenditures, so as the government spending increases economic activity, the money taken from the private sector decreases it at the same time. Because of the top heavy structure of the American tax system (most taxes are paid by the rich), some of the money the government gets comes from individual savings so that they do not immediately reduce private spending. To the extent that the funds come from people who would not otherwise spend this money, then the government spending has essentially the same effect as private spending. To the extent that government rakes funds that would otherwise be spent by private citizens, government spending has no positive effect.
Each of these three methods of spending also has a multiplier effect that must be considered. This means that when money is spent, the company or individual who receives it will also have more and will, in turn, spend some of what has been received. As a result, each dollar spent leads to more than a dollar increase in the GDP. Frequently, economists use the figure of $1.50 of increased GDP for each dollar of increased spending. The full multiplier impacts the first two kinds of spending; indeed, the addtional future spending to run the investments made following private investments are also the subject of the multiplier. For government spending, the multiplier only applies to the net increase achieved. To the extent that government spending simply shifts to spending by the government instead of by private individuals, there is no multiplier (since there is no real spending increase.)
The last type of spending increase is the worst of the group. This is spending on imports where the funds leave the country for good. The clearest example here is spending on foreign oil. A million dollars spent to import oil from Venezuela takes that million dollars out of the USA. No increase in economic activity results. There is no multiplier. Unless some of that money is used to buy US products, there is no increase in GDP.
This analysis is perhaps the clearest reason why I continually talk about the need to switch to domestic natural gas as a fuel for the economy. An investment in natural gas production and distribution will mean the biggest boost to the economy. It is a private investment and clearly the form of activity that provides the biggest boost to GDP. Simultanteously, it will reduce the level of oil imports, thereby removing this total drain on GDP growth. Sadly, the present administration does not seem to understand this bit of economic reality.
No comments:
Post a Comment