New York Times columnist Paul Krugman has a September 7 blog post arguing why additional government spending is arguably better than tax cuts to stimulate economic growth. I have actually never seen Krugman argue a case where tax cuts are preferred, but that’s not the point. Here is Krugman’s example:
So suppose we’re going to put $50 billion of resources that would otherwise be idle to work. Is it better to use them to produce public goods like improved roads, or private goods like more consumer durables? That’s not at all obvious — and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.
$50 billion of resources that would otherwise be idle? What does he mean, idle? Money is never idle. It is always in use. Money the U.S. borrows to fund stimulus projects is money taken from somewhere else (China usually) and redirected. Krugman knows this, of course, but he doesn’t address the major difference between government spending vs. private sector spending. It’s the known vs. the unknown. It is relatively easy to track $50 billion in spending projects. Whether roads, bridges, railways, or whatever, we can know exactly where the $50 billion will be spent.
But leave $50 billion in the hands of entrepreneurs and try to predict what will happen.
If you want government to drive the economy, move. If you want the private sector to drive it, we need to get government (and her obstacles) out of the way.