Comment 27959

By A Smith (anonymous) | Posted December 21, 2008 at 00:04:53

Mr.Meister, GDP is comprised of a few things, one of which is private consumption, the others being private investment, government spending and net exports. Therefore, when government spending goes up, it does so at the expense of the private sector, both in consumption and investment. In effect, money spent by the government, is money not spent by the private sector.

Therefore, if your goal is to increase private sector consumption, the best way to do this is to decrease government spending. What has happened recently, under Stephen Harper, is that government spending has grown faster than GDP, thus limiting the amount of private sector involvement in the economy. I believe this reduction of entrepreneurial activity has led to reductions in real output, as consumer signals have been replaced by central planning.

Under Jean Chretien and Mike Harris, government spending was forced to grow slower than GDP, thereby having the effect of accelerating private consumption and investment. It was this private sector consumption and investment that led to Canada being one of the best economies in the world during this same time period.

Having said that, I do believe government can limit the amount of damage it does to the economy, if it insists on spending a fixed percentage of economic output. That is why I have said that spending money on things like welfare and other cash based supports is much more preferable than direct government spending on things like schools and health care. By giving people cash, rather than rather than government managed programs, you at least move halfway towards a true free market. While it would be preferable to leave the money in the hands of the people who earn it in the first place, I believe it is still better to let consumers spend the money on things they value, rather than let the central planners do it. In this way, the economy will consume and therefore produce a much greater variety of products and services, then simply health and education.

By diversifying the economic base, you also increase the chance that the economy will stay on top of the newest and most productive technologies, much the same way the U.S. moved ahead of the U.S.S.R. in the fields of electronics, computers and automation, The Soviets, using a much more top down approach to their economy, rather than a consumer driven one, got stuck producing items too many items that were obsolete.

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