Imagine there was a new mutual fund with the following proposition. We want you to take money out of your current investments and give it to us. Here's our plan. First, we're going to impose a 20% load on your investment up front, so that you will have to take $1.20 out of your current portfolio for every dollar we invest. Then, we're going to invest your money in companies and projects that have such low return prospects that ordinary investment funds refuse to fund them.
Does that sound like something you'd be anxious to do? You're probably saying, "Why, the only way they could raise money for that fund would be to threaten to put you in jail if you didn't invest!" And you'd be right.
In fact this is a good approximation of the prospectus the Federal government should publish for it's spending operations.
1. Government raises the money it spends from taxes -- mostly income taxes. Compliance costs for administering this tax are about 20% of the revenue collected. That means that effectively the government takes $1.20 out of the economy for every $1 it plans to spend.
2. While in theory, government could spend most of it's money on things that have good economic returns, in practice it doesn't. It invests in things like Solyndra and Cash for Clunkers, but mostly it sends checks out to subsidize people who aren't producing much right now.
This is the fundamental reason why government spending is not, and really cannot be economically productive (or "stimulative") -- any more than the mutual fund we've described can produce better results than the ones in which you already invest.
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