Fake Economics

Politics and economics are interwoven. Government grants licenses, enforces contracts and the rule of law, provides fire and police protection, a national defense, and can call on resources to recover from crisis. Without these institutions, activity would slow. No one is building billion-dollar hotels in Syria, Libya, or Iraq; stability and certainty support investment.

The rule of law and stable institutions don't create growth by themselves, but they do provide the framework. It's entrepreneurs that see opportunity and reorganize existing resources in a different, more efficient, and more profitable way. That's how growth happens. Human nature, however, doesn't change. Politicians want to take direct credit for growth. Remember when Al Gore said he helped "create" the Internet?

One of the greatest myths in all of economics is the "Government Spending Multiplier" sometimes called the "Fiscal Multiplier." This concept came from a Keynesian, demand-side analysis of the economy that looks at something called the "marginal propensity to save." Someone who earns $100 but only spends $90 has a 10% marginal propensity to save. In the demand-side world, where consumption drives economic activity, the $10 in savings is seen as a negative. Having $10 less spending means $10 less in demand.

Politicians argue that taking that $10 from the saver, and giving it to someone who will spend it, increases growth. For example, Nancy Pelosi said back in 2013 that "unemployment benefits remain one of the best ways to grow the economy" because it "injects demand into our markets." She said every dollar spent on unemployment creates up to an extra $2 in GDP.