Seems to me that taxing and borrowing remove exactly the amount that government “spending” supposedly adds to the economy. Isn’t government spending actually a mere reallocation of resources from the producers to others that the government decides should possess these resources? There can’t possibly be an increase in macro economic activity, can there? Yet, it’s called “stimulus”. In fact, there should be a net “loss” due to the crowding out effect, and the fact that the government projects are likely to be boondoggles.
How is it that mainstream economists believe that “stimulus” actually stimulates? Why do they believe this?
It is simply a question of what is seen and what remains unseen. Most non-economists, and even a large portion of economists (I would venture to claim the majority, actually), only operate on what is seen.
Ideologically Based Explanation: Keynesian economics supports spending, especially government spending as the key to prosperity. As such, they support injecting cash into the economy to make it so that people are spending more and market confidence is higher.
Cynical Explanation: Most of these economists receive government funding. Why bite the hand that feeds you?
“when prices are adjusted for inflation, Americans today spend '40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s.”
Well, mainstream economics is basically about maintaining a particular level of aggregate demand so that all resources(labor for example) in the economy are put into use. During times of crisis, people may hoard money. This in turn would cause a lower aggregate demand, and since prices are sticky in the mainstream notion of the economy, the market doesn’t clear and businesses start cutting down their labor force. So in order to pull up aggregate demand back to that particular level where full employment of resources can be achieved, the government borrows money from people. And since government bonds are usually taken as safe deposits, people might dishoard from their money balances, and when the government spends this borrowed money, the (nominal) aggregate demand would increase.
It’s not just that people see the outlays of government spending without realising that this is first taxed.
The stimulus packages over the last couple of years by both administration are not based on taxation, but on debt. They are creating new money to finance their stimulus packages, which, unlike taxation, will rear its ugly inflationary, redistributive, and malinvestment inducing head several years down the line rather than right now. The stimulus packages will and are working to boost the economy in the short term at the expense of the long term. The question isn’t whether its working, but whether it should be done from the point of view of the people at large. Which, it should not. But politicians do not care about the long term, such is the nature of democracy. And large corporations in bed with the government gain from these wealth redistributing protectionist schemes too.
One: they see people ‘working’ and think that this is a good thing in and of itself, regardless of whether or not that work is of any real value (what is seen, what is not seen…).
Two: they receive government funding and spend time on TV shows talking with TV personalities and celebrities, and behind the scenes with political power players, and so are not likely to say something those people don’t want to hear (political and financial gain…)
Three: they think they know better/more than the mass of information embodied in the pricing system, and therefore think the government should use its power to categorically override the marginal judgements of consumers despite market signals toward change to maintain a certain capital structure which benefits certain parties (error, hubris…).