In this episode, Gene Tunny explores the relationship between government spending and wealth creation. He talks about President Obama’s memorable expression, “You didn’t build that”, and how economists think about the role of government and wealth creation. Gene discusses the roles of both the government and private sector in generating wealth and their impact on productivity, GDP and living standards.

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What’s covered in EP247

Government role in the economy - private sector vs public sector. (0:00)
Government spending and its impact on the economy. (5:52)
Keynesian economics and the role of aggregate demand in determining GDP. (11:51)
Government spending and its impact on productivity. (18:13)
Government intervention in the economy, with a focus on public goods and cost-benefit analysis. (25:11)
Government's role in the economy, potential for crowding out the private sector. (31:32)
Government impact on the economy and living standards. (38:20)

Takeaways

Government Spending and GDP: Government expenditures can contribute to GDP, but their efficiency and the type of spending critically determine their economic impact.
Private Sector's Role: The private sector is essential in wealth creation due to its efficiency incentives, but it also depends on government-provided infrastructure and services.
Crowding-out Effect: Excessive government spending can crowd out private investment, potentially reducing overall economic efficiency and growth.
Cost-Benefit Analysis: It is vital to conduct thorough cost-benefit analyses for government projects to ensure that public funds are used effectively and do not become a drain on the economy.

Links relevant to the conversation

Dan Mitchell’s article on the impact of government spending on economic growth:

https://www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth

Dan’s article “OECD Economic Research Finds that Government Spending Harms Growth”

https://danieljmitchell.wordpress.com/2016/11/28/oecd-economic-research-finds-that-government-spending-harms-growth/

Episode on Alvin Hansen and Evsey Domar:

https://economicsexplored.com/2024/06/19/popularizing-keynes-how-alvin-hansen-and-evsey-domar-shaped-post-war-macroeconomics-ep245/

Episode on Thatcher:

https://economicsexplored.com/2020/12/06/ep64-adam-smith-margaret-thatcher-with-dr-eamonn-butler/

Bacon and Eltis’s 1978 book “Britain’s Economic Problem: Too Few Producers”:

https://link.springer.com/book/10.1007/978-1-349-15863-8

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Full transcripts are available a few days after the episode is first published at www.economicsexplored.com.

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