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Originally posted by motion
I still don't get it... if the government spends $50,000 on a toilet seat, doesn't the contrator receive that $50k, then distribute the money to the CEO, employees, property manager, sub-contractors, suppliers, fuel costs, etc. ?? It all ends up in the economy anyway. I don't understand why when the government wastes the money, which I have no doubt they do, that money doesn't end up in the economy in some shape or form.
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Look at it this way. Let's say you have a purely market economy - no government at all. That means the only way to make money is by buying and selling goods and services. With no intereference, this market economy would be subject to pure supply and demand, and would tend equalize itself to provide the most benefit for the most people.
Now, introduce government into the equation and let's say that they tax people 50% of their income. That means that I can only buy half as many things as I used to buy, which means producers only produce half as many things, so they have to fire workers and cut capital investments, etc. Now, if the government did nothing but distribute money back into the system, like in subsidies, then everything would operate as before, because the government is taking up the all the buying that the consumer used to do.
But the government doesn't just give all the money back - it has to support the enormous bureaucracy. Which means that the consumers are buying less, producers are producing less, and government is not taking up all the slack that the consumer used to provide. Which means that there are suboptimal number of transactions occuring.
The problem is that the bureaucracy portion of the government takes money in but doesn't produce anything. You could argue that you're purchasing garbage removal services or street repair services from the government, but what are you buying from the people who administer social security? What service are they providing you?
I think you misunderstood my money multiplier analogy, or I didn't explain it correctly. A dollar spent in the private sector will "seem" like three dollars in the economy. That actual supply of money is still only one dollar, but, by exchanging that dollar for goods and services over and over, the one dollar's effect is multiplied.
But when the government takes in a dollar and doesn't really give anything back in the form of exchange of goods and services, that multiplier effect doesn't hold. The dollar supply is still the same, but the exchange of goods and services is lower than it would normally be. The difference between the optimal level of transactions and the level of transactions under taxation is called deadweight loss.