Reference no: EM13185862

Proponents of government spending claim that it provides public goods that markets generally do not, such as military defense, enforcement of contracts, and police services. Standard economic theory holds that individuals have little incentive to provide these types of goods because others tend to use them without paying. These views of spending assume that government knows exactly which goods and services are underutilized, which public goods will be value added, and where to redirect resources. However, there is no information source that allows the government to know where goods and services can be most productively employed. Federal spending is less likely to stimulate growth when it cannot accurately target the projects where it would be most productive. Also, congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.