It is prosperity that creates spending

Over at Café Hayek Russ Roberts has a post ‘Does spending create prosperity?’ which begins:

Does spending create prosperity? It’s a weird idea when you think about it. Spending is consumption. Consumption uses stuff up. How could it create prosperity? If anything, the causation is reversed – it is prosperity that creates spending.

I’ve often wondered why this basic concept, boiled down to the marrow here by Roberts, is so difficult for some people (and governments) to grasp. The idea that government spending generates prosperity has long been exposed for the Keynesian fallacy that it is.

IMF figures show that central government expenditure in New Zealand is 34.6% of GDP – which is enormous when you compare it to top performers like Hong Kong (17.5%) and Singapore (22.4%). The people of both those countries receive quality public goods and services – and have lower taxes and higher wages.

Roberts uses a neat analogy to describe US stimulus package policy later in his post:

Think of having a lot of wet wood and trying to get it going by lighting newspaper as kindling. There’s a fire for a while, while the newspaper is burning. But once the newspaper is consumed, the wood hasn’t caught. Even burning a lot more newspaper (bigger stimulus package) isn’t going to get the wood dry enough to catch fire.

The same applies to government spending in New Zealand. The role of the government should be to provide a framework that allows the economy to prosper. Cutting government spending is a sure way to heat up a damp economy.

Cutting government spending will generate higher growth. Growth generates prosperity. Prosperity creates spending: a roaring fire using dry wood without wasting stacks of paper getting it going.

For more on this topic read an article I wrote last year titled Faith in Government Spending is Misplaced.


1 thought on “It is prosperity that creates spending

  1. Pingback: Prosperity creates spending, not vice-versa | Kiwiblog

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