Government Spending

[Justice and Mercy]

There is a very prevalent idea that government debt doesn't matter in terms of economics, that attacking government spending on economic grounds is only valid insofar as the government must tax or print in order to spend.

But what of a government that simply borrows to spend indefinitely? More specifically, what is the economic negative when a government borrows foreign money, aside from eventually having to tax or print in order to repay it?

The answer to this question sheds alot of light on the principles of money in an economy.

Any takers?

[Rolling Thunder]

A government that borrows indefinitely will find it's borrowing soon becoming more expensive, and the economic negative of government borrowing foreign money is that it creates a transfer payment overseas, weakening the balance of payments.

[Justice and Mercy]

A government that borrows indefinitely will find it's borrowing soon becoming more expensive, and the economic negative of government borrowing foreign money is that it creates a transfer payment overseas, weakening the balance of payments.

We're missing the point of the thread. Again, "aside from eventually having to tax or print in order to repay those debts."

Borrowing is only "expensive" once you actually have to repay it.

If my country, the United States, can keep borrowing money from China without ever having to repay it, what would be the downside? Or, if you want to be realistic, if we're able to go a very long time without repaying it, what would be the downside during that time period?

[Rolling Thunder]

Economically, none, speaking cetrus paribus.

[Justice and Mercy]

Economically, none, speaking cetrus paribus.

This, I think, is indicative of a primary fault in modern economic thinking, of looking at money as some kind of magic that creates wealth merely by existing.

What is forgotten is that money is merely a medium of exchange, that what people actually trade is products. Lord Keynes himself called Say's Law his "point of departure" from free-market economics.

But I bring up this very specific example precisely because the error can easily be exposed. If a government is spending money, it is diverting actual resources towards certain ends, be it making tanks or digging ditches. Money is a claim to production. The actual resources available to the economy haven't changed, but purchasing power HAS shifted, away from everyone that isn't the government, away from anyone else who might've been in the market for whatever products the government has claimed.

Even in an ideal scenario, indefinite free money from abroad, government spending is bad for the economy.

EDIT: It should be noted that the actual purchasing power of the nation can expand in this manner, but realistically it wouldn't make up for the damage caused, and if we stop talking about a national economy and rather a world economy we can see that the damage is severely multiplied. If you want an explanation of this aspect, ask me.

[Rolling Thunder]

Your analysis falls on it's face when it fails to consider that recession is caused by a loss of demand - ergo, an underutilization of present economic resources - ergo, government spending is meant to (in Keynes argument) prop up that loss of demand. It also fails to consider that this money must go from the government to consumers and producers (either as wages, purchases or transfer payments), which in turn will result in inflationary pressure which is the primary reason sustained government borrowing is unhealthy for an economy, as eventually inflation begins to cripple the real economy more than spending aids it.

[conon394]

This, I think, is indicative of a primary fault in modern economic thinking, of looking at money as some kind of magic that creates wealth merely by existing.

The thing is how expensive is the borrowed money vs taxes or cutting services - in other words what is the opportunity cost.

Even in an ideal scenario, indefinite free money from abroad, government spending is bad for the economy.

How? to take your example if the people want ditches and tanks than government spending is not bad.

The actual resources available to the economy haven't changed, but purchasing power HAS shifted, away from everyone that isn't the government, away from anyone else who might've been in the market for whatever products the government has claimed.

Only in the most surreal aggregate sense. The US government was established not for the good of the world by by and for its own citizens. Thus if US bonds for whatever reasons are so valued that the US can borrow money very inexpensively (as it can now) and use that money to make super carriers or roads I not sure how the US economy is suffering. The instrument in question is a bond so at best lacking government borrowing than you have to consider two other factors: First of course unless you don't want government services or taxes go up borrowing is going to happen. More importantly lets realize a lot of US debt is held by institutions and individuals who need a no risk investment that is better than cash. That money is not going to be put into hedge funds, or stock or anything risky at best it will flow into a bonds of a very few companies, other nations sovereign debt, gold, cash or just government backed banking instruments (which means more taxes so the government can say back the FDIC)

Besides why not step away from the canard of the US debt being primarily held by China or such...

[Teutonic Warlord]

There is a very prevalent idea that government debt doesn't matter in terms of economics, that attacking government spending on economic grounds is only valid insofar as the government must tax or print in order to spend.

But what of a government that simply borrows to spend indefinitely? More specifically, what is the economic negative when a government borrows foreign money, aside from eventually having to tax or print in order to repay it?

The answer to this question sheds alot of light on the principles of money in an economy.

Any takers?

A nation's high government debts hurt that nation's economy.

Article: National Debts Can Threaten Economic Growth

[IMG]http://media.voanews.com/images/480*296/gdp_to_debt_graphic_480_eng_27jul11.jpg[/IMG] Photo: VOA - J. Randle Efforts to slash national debts are at the heart of fierce debates in United States and protests in other nations. In some cases, these government debts are bigger than the entire economic output of the nation for a year. Debt problems can slow economic growth, raise interest rates and make financial problems worse. To get an idea just how large a nation's debts are, economists compare the size of the debt with the size of the nation's economic output. Economist Till Schreiber says too big a debt burden can hurt the economy. "There is some research by economists that on average across all different countries - rich and poor and medium income countries - 90 percent debt-to-GDP ratios suggest a slowdown in growth," said Schreiber. Schreiber teaches at the College of William and Mary in Virginia. He says nations with strong industries and domestic savings, like Japan, can bear far larger debt burdens than other countries, like Portugal, which has lost many of its industries and jobs to foreign competition. Lenders express their confidence in Japan's economy by offering loans to Tokyo at relatively low interest rates, while Portugal has to pay a high rate, called a "risk premium." La Salle University Finance Professor Walt Schubert says investors and lenders set interest rates by looking closely at a nation's economy. "The ability to pay [repay loans] is the ultimate issue," said Schubert. "What investors are worried about is what is going to happen to your debt and what is going to happen to your GDP." Although experts have no doubt about the ability of the United States to repay its loans, major credit rating agencies warn that they might downgrade America's credit rating unless Washington resolves the political impasse between President Barack Obama and Republicans in Congress. Some experts say a downgrade of America's AAA credit rating is a strong possibility, even if Congress and the President manage to work out a deal before August 2 - the date the United States is expected to reach its debt ceiling and default on its financial obligations. A lower credit rating would bring higher interest rates on the $14.3 trillion U.S. debt, which is nearly as much as the value of all of the goods and services produced in the United States in a year. The U.S. debt is so large that even a small interest rate increase would cost billions of dollars. American Enterprise Institute scholar Kevin Hassett says a debt rating change could set off a downward economic spiral for the United States. "As your rating goes down a little, the interest rate goes up a little, and then you have got to make more interest payments and so your deficit gets larger," said Hassett. "And the larger deficit makes the rating agency a little more nervous and so they lower your rating again. And then you end up in kind of a death spiral." Hassett says the U.S. government takes in about $185 billion a month from taxes and other sources, but pays out about $300 billion a month, which he calls unsustainable.

(Source: http://www.voanews.com/english/news/...126211048.html)
The US is currently sitting at a 103.7% gross debt to GDP ratio. (Source: http://www.usdebtclock.org/) Please note that I did round to the tenth place and this number will increase over time. Also...

But how does the public debt affect the economy as a whole? Is a large public debt an indicator of bad economic times to come? The United States Government Accountability Office (GAO), says that a rising national debt, particularly when viewed as a percentage of a nation's GDP, is a big problem, although a long-term one.
The GAO explains that the more debt a country holds, the less money it's able to put away in savings and reinvest in the nation's economy. In the United States, in particular, the Social Security, Medicare and Medicaid savings accounts are going to be hit hard by the retirement of the Baby Boomers. The government will no longer be able to tap into these accounts to pay for other federal programs. The GAO also warns that federal borrowing to pay off the deficit will inevitably lead to higher interest rates, affecting the ability of citizens to buy homes and take out loans. That could lead to a broader economic slowdown, or even recession [source: GAO].

(Source: http://money.howstuffworks.com/perso...ment/debt4.htm)

Is this what you are looking for?

[Justice and Mercy]

Your analysis falls on it's face when it fails to consider that recession is caused by a loss of demand - ergo, an underutilization of present economic resources

Which analysis?

- ergo, government spending is meant to (in Keynes argument) prop up that loss of demand. It also fails to consider that this money must go from the government to consumers and producers (either as wages, purchases or transfer payments), which in turn will result in inflationary pressure which is the primary reason sustained government borrowing is unhealthy for an economy, as eventually inflation begins to cripple the real economy more than spending aids it.

I actually made a whole thread on this subject not to long ago, but I suppose it's relavent in the sense that it's what I'm getting at.

"Loss of demand" is not a causeless event. For one reason or another people don't want to buy the products being offered at the prices they're being offered at. The issue, properly, is ALWAYS on the side of supply. After all, supply begets supply. That is: When the ice cream maker buys a house, he's paying for his house in ice cream. This, of course, wouldn't be possible without money, but this truth remains nonetheless.

In other words, there is no mythical "general glut." There are goods that aren't being bought, which means different goods ought to be made.

The thing is how expensive is the borrowed money vs taxes or cutting services - in other words what is the opportunity cost.

The last question is the right one, but your focus is too narrow. Oppurtunity cost applies regardless of how expensive the borrowed money is. Simply: Because oppurtunity cost is bad not as it applies to money, but as it applies to actual products.

When more resources go into digging ditches, less are available to other ends.

Only in the most surreal aggregate sense. The US government was established not for the good of the world by by and for its own citizens. Thus if US bonds for whatever reasons are so valued that the US can borrow money very inexpensively (as it can now) and use that money to make super carriers or roads I not sure how the US economy is suffering.

Well now you can be sure how it's suffering, because I'm explaining it.

Building super carriers takes alot of manpower, manpower that could be used for something else.

Besides why not step away from the canard of the US debt being primarily held by China or such...

Because it's being used to illustrate a supposedly ideal government spending scenario: Free money from abroad that's never paid back.

A nation's high government debts hurt that nation's economy.

How?

I know that it can, but I believe that the "how" is extremely important to understand.

[Rolling Thunder]

Which analysis?

The one you just made.

"Loss of demand" is not a causeless event. For one reason or another people don't want to buy the products being offered at the prices they're being offered at. The issue, properly, is ALWAYS on the side of supply. After all, supply begets supply. That is: When the ice cream maker buys a house, he's paying for his house in ice cream. This, of course, wouldn't be possible without money, but this truth remains nonetheless.

In other words, there is no mythical "general glut." There are goods that aren't being bought, which means different goods ought to be made.

I fail to see how you can extrapolate this conclusion from your above reasoning. Yes, loss of demand is not a causeless event - it occurs, traditionally, due to a sudden contraction in the money supply. What happened in '08? Sudden contraction in the money supply. Suddenly, a whole lot of money - fake money, but still money that was being traded - ceased to exist. The money supply contracted.

When more resources go into digging ditches, less are available to other ends.

This analysis now completely overlooks specialization. Real economic resources are specialized. Shovels, for example, can generally be used to dig (and in extreme spots as murder implements). The same can be said of JCBs, or most real-life capital. So, would you care to explain how the government buying, say, a thousand shovels (with new money, not taxed money) will cause a reallocation of economic resources? Which economic resources will those be?

Building super carriers takes alot of manpower, manpower that could be used for something else.

Except we have a manpower surplus (otherwise known as unemployment), so now is in fact the best time to build said supercarrier as labour is more plentiful, more mobile and cheaper.

[Justice and Mercy]

The one you just made.

Okay, which aspect of my analysis falls flat on it's face? I never went into recessions or gluts. Granted, they're connected, but I'm not sure you see the actual connection.

I fail to see how you can extrapolate this conclusion from your above reasoning. Yes, loss of demand is not a causeless event - it occurs, traditionally, due to a sudden contraction in the money supply.

What happened in '08? Sudden contraction in the money supply. Suddenly, a whole lot of money - fake money, but still money that was being traded - ceased to exist. The money supply contracted.

Package-dealing. The actual problem wasn't that the money supply contracted, it was very simply that a certain kind of good was no longer being demanded like it had been before (which means: There was the wrong kind of supply). Or: The bubble burst.

Now, a bubble bursting isn't neatly contained to a single sector. The entire capital structure is inter-connected, and morphs according to changes in other sectors. This "fake money" (which was actually the wrong kind of supply) made certain sectors and certain areas profitable, until the capital structure fell apart (as it had to).

This analysis now completely overlooks specialization.

And your narrow focus overlooks something more important: Resource allocation.

What builds tanks? Human beings and the machines (which, ultimately, had to be built by human beings). These human beings didn't have to be building tanks, and wouldn't have if there was no money in it. They would've found another way to make themselves useful. The capital structure would've formed differently.

So, would you care to explain how the government buying, say, a thousand shovels (with new money, not taxed money) will cause a reallocation of economic resources?

In precisely the same way the government buying tanks causes a reallocation of economic resources: By making certain fields profitable that otherwise wouldn't have been.

Which economic resources will those be?

Ultimately: Human effort.

Except we have a manpower surplus (otherwise known as unemployment), so now is in fact the best time to build said supercarrier as labour is more plentiful, more mobile and cheaper.

...thereby shifting the capital structure to the end of building a supercarrier.

Unemployment exists because the right capital isn't in place. I have argued that WWII did help the economy, but in the opposite way that most people think it did. Post WWII there was a giant slash in government spending. Suddenly, resources that were being used to the end of war were freed up. The policies that had been in place during the Great Depression (and even at the time) no longer "froze" capital in place, because it wasn't in place.

[Astaroth]

In precisely the same way the government buying tanks causes a reallocation of economic resources: By making certain fields profitable that otherwise wouldn't have been.

I think you overlook something important -- govt spending can also change the demand or adapt the supply to the demand. And I mean in a way that does not somehow artifically alter the whole economic system,

Example: an American auto company kept following their same old design philosophy --> people started hating it, the company went downhill. By the time they noticed it, they lacked the money to change something or reverse the trend. In comes the govt, gives them money, they change stuff for the better, suddenly people buy the cars again. Thus, new demand was "created".

Another example would be subsidizing the development of a new technology that is still not very cost-effective but, given enough funds, might become so (and as a result become more desirable for the customers --> new demand).

[Teutonic Warlord]

How?
I know that it can, but I believe that the "how" is extremely important to understand.

Look at my two source articles again, especially the one at the end (http://money.howstuffworks.com/perso...ment/debt4.htm). A higher government debt will cause more money to be used to service at least the interest. That money will not be invested into the economy, but into a debt. At first the effect may not be noticeable, but once you hit a certain amount, you are pulling enough money from investment into the economy that economic growth is slowed. Then, if your economy doesn't seem capable of paying off the interest or debt, loaners will lower credit ratings and increase interest rates for loans to make up for the risk involved. Interest rates go up throughout the country, and that will slow down economic growth even more (because of the currently existing economic recession) because of even less borrowing. Eventually, the government's debt will become so large that it will either have to greatly increase taxes to keep its social programs (welfare, Social Security, Medicare/Medicaid, etc) or give them the axe. One will make one group even worse off economically, the other will certainly drive others into poverty.

That's how I perceive it would work from reading the two articles I listed, anyway. Feel free to correct me if I misinterpreted or something.

[Denny Crane!]

Spending borrowing more money sloshing around in an economy is a contributory cause to distortions, bubbles and inflation as well as sucking productive money out in taxes to repay interest and of course the long term cost of stability.

Not something any economic theorist agreed with on any side of the fence. Borrowing was to be done only when necessary, when a clear apparent reason (in Keynes case recession) arises not just another election necessitates another batch of spending or another feckless war.

[Thrillology]

Obama isn't a good leader. He's a horrible one- look at how our economy crashed when he stepped in. If he's reelected, the U.S will switch to socialism and the economy will go beyond bankrupt due to his stupid spending and creating temp 'jobs'.

[conon394]

The last question is the right one, but your focus is too narrow. Oppurtunity cost applies regardless of how expensive the borrowed money is. Simply: Because oppurtunity cost is bad not as it applies to money, but as it applies to actual products.

No rather you are making an argument that is too broad. On balance you look to tying to find a basis to argue for no government but logic here is not going to work.

First in the narrow sense in any reality where governments exist and there people expect them to provide services the only question is opportunity cost on the getting the money (taxes or borrowing) and the lack or richness of services provided. The money is no more loss or miss-allocated than it would be by any other entity a company [say that goes bust leaving behind a specialized build nobody wants, perhaps pollution and unsold products].

I fail to see how the product is a poor allocation - The people have a government, they want it to do X number of things, for whatever reasons they also do not want those things provided by the private market ergo there is no loss to the society. Is the public sector subject to waste fraud and such, sure but so are all human constructs - see Enron.

I suppose you could argue that to the extent the US debt is seen a refuge of money and zero risk it costs other countries some loss of capital that serves US interests rather than local ones and so somebody looses out but that is a potential all the time. A place like Germany viewed as safe and not corrupt might well attract far more investment than say Iraq (sure the big oil player are in Iraq but you don't see Ford or Toyota working all that hard to establish a footprint).


-----------------------

Look at my two source articles again, especially the one at the end (http://money.howstuffworks.com/perso...ment/debt4.htm). A higher government debt will cause more money to be used to service at least the interest. That money will not be invested into the economy, but into a debt. At first the effect may not be noticeable, but once you hit a certain amount, you are pulling enough money from investment into the economy that economic growth is slowed. Then, if your economy doesn't seem capable of paying off the interest or debt, loaners will lower credit ratings and increase interest rates for loans to make up for the risk involved. Interest rates go up throughout the country, and that will slow down economic growth even more (because of the currently existing economic recession) because of even less borrowing. Eventually, the government's debt will become so large that it will either have to greatly increase taxes to keep its social programs (welfare, Social Security, Medicare/Medicaid, etc) or give them the axe. One will make one group even worse off economically, the other will certainly drive others into poverty.

That's how I perceive it would work from reading the two articles I listed, anyway. Feel free to correct me if I misinterpreted or something

Of course there is a cost borrowing and it can become prohibitive - but the same can be said for taxes. On balance that is the risk of borrowing just like a mortgage/loan that any company or individual might take. It depends how you use the money how much debt you acquire and what your cash flow is.

[Justice and Mercy]

Not something any economic theorist agreed with on any side of the fence.

So they claim, but question them on this issue. You'll find that they put forth no basis for this distinction. If belief in an alien invasion would help now, why not when things are going pretty well? If the growth of an economy can be measured by the velocity of money, why stop encouraging that velocity when things get better?

Look at my two source articles again, especially the one at the end (http://money.howstuffworks.com/perso...ment/debt4.htm). A higher government debt will cause more money to be used to service at least the interest. That money will not be invested into the economy, but into a debt. At first the effect may not be noticeable, but once you hit a certain amount, you are pulling enough money from investment into the economy that economic growth is slowed. Then, if your economy doesn't seem capable of paying off the interest or debt, loaners will lower credit ratings and increase interest rates for loans to make up for the risk involved. Interest rates go up throughout the country, and that will slow down economic growth even more (because of the currently existing economic recession) because of even less borrowing. Eventually, the government's debt will become so large that it will either have to greatly increase taxes to keep its social programs (welfare, Social Security, Medicare/Medicaid, etc) or give them the axe. One will make one group even worse off economically, the other will certainly drive others into poverty.

That's how I perceive it would work from reading the two articles I listed, anyway. Feel free to correct me if I misinterpreted or something.

You're not wrong, but that's not the focus of this thread. Aside from having to pay the debt back, the more important downside exists: Government demand.

No rather you are making an argument that is too broad.

There's no such thing as an argument that's "too broad". Economics, even just the nature of money, is a very broad subject.

On balance you look to tying to find a basis to argue for no government but logic here is not going to work.

No I'm not. I have consistently argued that if government spending is to be argued for it cannot be argued for on economic grounds. If you want tons of military spending tell us why you think that's a proper function of government, and we can proceed to have a political discussion.

The purpose of this inquiry isn't to look into politics, but into economics, we look into politics only insofar as it's related.

First in the narrow sense in any reality where governments exist and there people expect them to provide services the only question is opportunity cost on the getting the money (taxes or borrowing) and the lack or richness of services provided.

In a sense that's correct, but not in the sense that you mean it. The "oppurtunity cost" is whatever that money may have been employed to do. That's precisely what I'm talking about: Certain resources are used up to uneconomic ends.

To get to the heart of the matter: Even when the money doesn't come from the local economy, it still in being employed has an "oppurtunity" cost, because the real resources available to the local economy haven't changed. The injection of foreign money only matters insofar as it redirects capital in a certain direction, it doesn't itself create wealth.

I fail to see how the product is a poor allocation - The people have a government, they want it to do X number of things, for whatever reasons they also do not want those things provided by the private market ergo there is no loss to the society.

There's no such thing as a "loss" or "gain" to a society as such. There can be "loss" or "gain" to groups of individuals only.

Most importantly: Even if a person believes they're gaining from a certain activity, they might not be, and ignorance in economics would be a huge factor in this.

[Gpower]

So they claim, but question them on this issue. You'll find that they put forth no basis for this distinction. If belief in an alien invasion would help now, why not when things are going pretty well? If the growth of an economy can be measured by the velocity of money, why stop encouraging that velocity when things get better?

Governments don't encourage growth during period of economic boom because inflation is the more pressing issue. Growth basically goes hand in hand with inflation, which lowers international competitiveness, may cause a wage-price spiral, destabilize the currency and so on. Thus during periods of economic growth, governments should theoretically run surplus budgets to put growth and inflation in a manageable rate, and also to save money which can be spent in the next recession. For example, in Australia the Howard government ran a surplus budget for a decade or so, so during the Global financial crisis the government has a lot more room to act without causing too much debt.

You're not wrong, but that's not the focus of this thread. Aside from having to pay the debt back, the more important downside exists: Government demand.
...
No I'm not. I have consistently argued that if government spending is to be argued for it cannot be argued for on economic grounds. If you want tons of military spending tell us why you think that's a proper function of government, and we can proceed to have a political discussion.
...
The "oppurtunity cost" is whatever that money may have been employed to do. That's precisely what I'm talking about: Certain resources are used up to uneconomic ends.

How is government demand a down side? Sure, private sector may be more efficient than the public sector, but during a recession, resources are unemployed - the private sector isn't able to use all available resources. Those resources are just hang around, people unemployed and causing even less demand due to the unemployment. The government steps in and use those resources in whatever way it can to prevent even further fall in demand and hence the unemployment of resources. While those resource may be used in a more efficient manner theoretically, that is not the reason for government spending during a recession!

To argue that there is a loss in Opportunity Cost due to government spending, you are ignoring the fact that the resources are unemployed. In other words, those resources will not produce anything unless the government or the private sector uses it. During a recession, the private sector is unable to use these resources due to the lack of demand. Thus, even if the government is less efficient, there is no lost in Opportunity Cost, since the more efficient private sector will not use those resources.

And there are obvious social benefits from government spending as well, but as you wish, I will not discuss those.

[Justice and Mercy]

Governments don't encourage growth during period of economic boom because inflation is the more pressing issue.

Except they do encourage growth during periods of economic boom. Over the last decade we saw a rapidly expanding economy with roughly average price inflation that was driven primarily by Fed policy.

The line of demarcation cannot be pinpointed, and it's nonsense to begin with.

For example, in Australia the Howard government ran a surplus budget for a decade or so, so during the Global financial crisis the government has a lot more room to act without causing too much debt.

And my argument is that it's the acting, aside from the debt, that's the issue.

How is government demand a down side? Sure, private sector may be more efficient than the public sector, but during a recession, resources are unemployed - the private sector isn't able to use all available resources.

Resources must be constantly unemployed and re-employed for an economy to grow. If resources are unemployed for a long period of time, it's likely because government policy has reduced the range of economic action.

Alot of the problem is cultural. People feel entitled to jobs in their field of choice, and are unwilling to choose something else if that becomes unlikely.

Those resources are just hang around, people unemployed and causing even less demand due to the unemployment.

The solution certainly isn't to misuse these resources, it's to allow them to be used economically.

That is, to get the government out of the market.

To argue that there is a loss in Opportunity Cost due to government spending, you are ignoring the fact that the resources are unemployed.

I have always argued that unemployed resources are a very important aspect of economic growth. Again, I point to my WWII example, where capital was put towards a certain end (war) and than suddenly dropped. The market was free to re-organize itself.

If there is truly no efficient way to use those resources, we're in a hole and will never get out.

During a recession, the private sector is unable to use these resources due to the lack of demand.

Quite a misunderstanding of the real issue. A lack of demand is a lack of supply (supply and demand are the same thing looked at from two directions). It means that the wrong goods are being supplied. The only way this can be fixed is by the market re-organizing the capital structure, making better goods.

This can only happen if capital is left to "float" freely, rather than being employed for the sake of being employed.

[Gpower]

Except they do encourage growth during periods of economic boom. Over the last decade we saw a rapidly expanding economy with roughly average price inflation that was driven primarily by Fed policy.

The line of demarcation cannot be pinpointed, and it's nonsense to begin with.

Well, I do not know US's economic situation is too much depth, but there is nothing wrong with promoting growth if inflation is under control. You originally asked why government seek to reduce the money flow during periods of economic boom. Usually, it's to reduce investment and run surplus budgets to control inflation. If inflation is not an issue, then the government will most likely encourage economic growth, which usually comes hand in hand with higher money flow.

Resources must be constantly unemployed and re-employed for an economy to grow. If resources are unemployed for a long period of time, it's likely because government policy has reduced the range of economic action.

Alot of the problem is cultural. People feel entitled to jobs in their field of choice, and are unwilling to choose something else if that becomes unlikely.

The solution certainly isn't to misuse these resources, it's to allow them to be used economically.

That is, to get the government out of the market.

I have always argued that unemployed resources are a very important aspect of economic growth. Again, I point to my WWII example, where capital was put towards a certain end (war) and than suddenly dropped. The market was free to re-organize itself.

If there is truly no efficient way to use those resources, we're in a hole and will never get out.

Quite a misunderstanding of the real issue. A lack of demand is a lack of supply (supply and demand are the same thing looked at from two directions). It means that the wrong goods are being supplied. The only way this can be fixed is by the market re-organizing the capital structure, making better goods.

This can only happen if capital is left to "float" freely, rather than being employed for the sake of being employed.

This is an interesting analysis. It is true that there needs to be certain amounts of unemployment in a healthy economy. However, economist usually shoot for around 5%, not some double digit figure. Even assuming the private sector can adjust itself fast enough and employ these resources in more productive areas, such rapid changes usually destabilise society. However, I do agree that stubborn people who insist on working in a inefficient industry is hindering a economy's ability to become more productive.

Additionally, I must say that sometimes a lack of demand cannot be solved by producing better products. Often during a recession, consumer confidence is the major reason for the lack of demand. It's not that people are distasified with the products, rather, people do not want to spend due to lack of job security. You may be able to produce a superior product, but if the consumers want to save the money due to lack of job security, they will not buy said product regardless how attractive it is (given said 'superior product' is within reasonable limits, of cause). That why government must employ resources and increase consumer confidence. Once confidence is restored to a certain point, the market can easily take care of those unemployed resources in a more efficient way.

I can't say I'm very knowledgeable in the economic environment directly after WWII, but I dare make a few guesses as to why to economy is able to rearrange itself quickly. The economy became geared towards war goods during WWII, which meant there is a significant shortage in consumer goods. Once the war ended, the high demand for consumer goods gave the market the level of demand needed to quickly adjust the economy. Also, note that the demand is not for superior products, so no real technological advances are needed to satisfy the demand. There isn't a need for new capital to produce said consumer goods either, as a tank factory can easily be modified to produce, say cars.

This stands in contrast to your theory, where the market will offer better alternatives to rise demand when demand is weak. During the post-WWII period, no 'better alternatives' is need to satisfy the initial demand. Of cause, as a result of high economic activity, better products will be produced, further pushing the growth of the economy, but I'd argue that this is a result of the already strong growth rather than the reason for the initial adjustment in the economy.