Wednesday, January 27, 2010
Government supported demand is just as "real" as private sector demand
You often hear people say that because the government was providing stimulus to the economy or supporting output then somehow the economic activity related to that is "phony."
Ask those people, then, if the cars produced and sold as a result of "Cash for Clunkers" were phony? Were they really just inflatable copies of cars that you couldn't actually drive?
Of course not.
How about the houses built and sold as a result of government subsidies to the housing market? Were the houses really cardboard cutouts or simple facades with nothing behind them?
Once again the answer is no.
If the goods and services produced as a result of government supported demand are in fact real, then there is no way you can say the economic activity is phony. It's simply not true and it's just a crazy statement that makes no sense at all.
The true wealth of a nation is defined by the total quantity of real assets produced and available for use by its citizens. It makes no difference if they were produced by government or the private sector.
True, government and the private sector might allocate capital differently and the economy could end up looking a little different (less consumer goods, leisure, more infrastructure, education, etc), but government support of output and income is no less real than that of the private sector.