Monday, March 10, 2014

German fiscal policy is not so obviously “onerous”

In Germany last year, households and nonprofits directly consumed 57.4 percent of domestic production. Foreigners (on net) bought another 6.3 percent. Germany invested another 16.7 percent. That comes to 80.5 percent of production. So how can Cato’s Daniel J. Mitchell reasonably claim that “government spending consumes about 44 percent of economic output” as he does in today’s blog post?

The answer is, he cannot. The German government claimed only 19.5 percent of economic output, and even then consumed only 7 percent. The remaining 12.5 percent of economic output– though counted as government expenditure– was in fact consumed by the private sector.

Thus, the domestic private sector eventually claimed almost 93 percent of all economic output.1 So what did Mitchell really mean? The German government received taxes sufficient to purchase 44 percent of GDP, and spent money sufficient to purchase 44 percent of economic output. That’s fine as far as it goes, but it does not tell us how burdensome the government spending. After all, traders spent $108 trillion on stocks in 2008. Does Mitchell believe that they therefore consumed 175 percent of the economic output of the entire world?

Suppose that government directly confiscated every bit of income produced by the economy, but then returned it dollar-for-dollar to each person. Though the government did nothing, Mitchell claims that government consumed 100 percent of economic output. He may not like that governments take money from some and give to others to spend, and he may not like that governments purchase goods and services and give to others to consume, but he inexcusably exaggerates the amount of output actually consumed by the German government.

1 claims include the amount saved through net sales to foreigners

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