The president seems to labor under the impression that nearly all government spending adds to the economy and that wealth in private hands does not. Certainly, though one can debate the relative efficiency of programs funded by the government, a case can be made that some government spending can add to economic growth when such spending truly represents an investment (to use the president’s favorite buzzword) in, for example, scientific research, infrastructure, or education. In reality, however, most government spending has little to do with investing. Even under a fairly broad definition of “investment,” such spending represents less than 13 percent of this year’s budget. By far, most of the rest consists simply of transfer payments — that is, taking money from one person and giving it to another. Transfer payments add to GDP only in a technical sense, but they do not create any new wealth or increase productivity.
On the other side of the equation, it is important to remember that every dollar that the federal government spends must first be extracted from the private sector, through either taxes or borrowing. That means that those resources are not available for the private sector to invest in ways that grow the economy.