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will continue to buy the same collection of other consumer goods as they did before and add the released $ 100 to their savings. In this case even in the simple Keynesian analysis, the effect of the government expenditures is completely offset: government expenditures go up by $ 100, private down by $ 100. Or, to take another example, the $ 100 may be spent to build a road that a private enterprise would otherwise have built or the availability of which may make repairs to the company's trucks unnecessary. The firm then has funds released, but presumably will not spend them all on what are less attractive investments. In these cases, government expenditures simply divert private expenditures and only the net excess of government expenditures is even available at the outset for the multiplier to work on. From this point of view, it is paradoxical that the way to assure no diversion is to have the government spend the money for something utterly uselessthis is the limited intellectual content to the "filling-holes" type of make-work. But of course this itself shows that there is something wrong with the analysis. |
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In the second place, nothing is said in the simple account about where the government gets the $ 100 to spend. So far as the analysis goes, the results are the same whether the government prints extra money or borrows from the public. But surely which it does will make a difference. To separate fiscal from monetary policy, let us suppose the government borrows the $ 100 so that the stock of money is the same as it would have been in the absence of the government expenditure. This is the proper assumption because the stock of money can be increased without extra government expenditure, if that is desired, simply by printing the money and buying outstanding government bonds with it. But we must now ask what the effect of borrowing is. To analyze this problem, let us assume that diversion does not occur, so in the first instance there is no direct offset to the $ 100 in the form of a compensating drop in private expenditures. Note that the government's borrowing to spend does not alter the amount of money in private hands. The government borrows $ 100 with its right hand from some individuals and hands the money with its left hand to those individuals to whom its expenditures go. Different people hold |
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