Spending by federal, state, and local governments accounts for about twenty percent of the GDP.
Actually, spending is the easy part - politicians love to shop - it's paying for it that gets messy.
This diagram shows how it flows;
it's mainly self-explanatory (except for the pies-in-the-sky, which is a subtle metaphor).
Click on a hot zone for an explanation.
So there it is: government spending can be a short-term stimulus, deficits can cause a long-term drag... and the "pies" are tempting but menacing.
Types of Spending
It's interesting to think about types of government spending by classifying projects according to profitability and usefulness:
Useful Projects
Useless Projects
Unprofitable Projects
Unprofitable-but-useful includes the basic necessities: national defense, interstate highways...
Mutant version of the box on the left: science-fiction weapons systems, public works boondoggles...
Profitable Projects
Government shouldn't go here, to avoid competing with private enterprise.
No such thing!
Note that unprofitable-but-useful projects can be unprofitable in themselves, but open up profitable opportunities when they're complete.
Early government development of the Internet is one example.
If Keynesian style spending ever comes back into fashion, those would be the types of projects that might make the most sense: public investment that creates real wealth, rather than make-work programs that just keep people busy.
Some libertarian economists believe that the economy always knows whether spending is appropriate,
and when the government strays out of the upper left box the economy turns neurotic and throws a recession.
