A modest proposal to improve the economy: Many parts of America are experiencing a drought. A little more rainfall, a little more water, would boost agriculture, allowing more rice, fruits, and other crops to be harvested. Let us say an additional 1% could be harvested – that would be a gain to agriculture of over one billion dollars.
For less than one tenth of the projected gains – only $100 million – I could improve the American economy. I propose to use an ancient Celtic rain dance, which my ancestors have long kept secret – but you know that Ireland has never had a truly long dry spell for centuries. For a modest one tenth of the gains, I will put these venerable Celtic secrets to work, to the benefit of America.
Some skeptics may doubt that this ancient and arcane wisdom could actually increase rainfall in America. I propose to you that the economy would benefit even if there were no increase – even if there had been no shortfall in the rain to begin with! I rely upon no less an authority than Paul Krugman for this assertion; he has clearly stated that defending against an imaginary threat of invasion from space would be beneficial to the economy.
This seems like strong economic magic – “voodoo” perhaps. In a moment, all will be clear. Let us first define “the economy” to be the “Gross Domestic Product.” We define the GDP to be the sum of four things: C, I, G, and X. G, of course, is Government Spending. By increasing G, we increase the sum.
A heckler in the back wants to know where the increase in G will come from. Why, I do not know; perhaps taxes, perhaps inflation, perhaps it will be borrowed. In only the first case will C and I be reduced; therefore, we will not raise taxes.
The Heckler wants to know if there are any other costs not mentioned. Well, to be honest, if my firm Rain Dances R US – catchy name, isn’t it? – is given $100 million, we will quit our day jobs. We will no longer produce whatever else we were producing. But we’ll be spending, see. We’ll buy new homes and cars and clothing and food and stuff. This will boost C, Consumer Spending. This is the Magic Keynesian Multiplier. Once the pump is primed with G, Government Spending, the Magic Keynesian Multiplier will turn it into more and more C.
The Heckler asks: and does that work? Why don’t we just spend our way to prosperity? Ah, that would be because Hecklers such as you prevent us from spending enough.
For more on this topic – and why GDP is not a proper measure of “the economy” – see this article by Joseph T. Salerno.