Bearish commentators such as Karl Denninger have often resorted to the argument of opposing “pulling forward” growth vs “organic growth”. What began principally as the desire to dispel some economic confusion became in the course of my analysis a study questioning the economic model we work upon.

In that respect, it is interesting to address some of Denninger’s latest contributions. It should be precised in the first place that I share the analysis that, economically, the US has been living beyond its means and on a credit generously provided by the rest of the world.

This being said, I believe the argument of “pulling forward” growth is more an ideological argument than a scientific or economic one. And I also believe that Denninger is afraid to go to the end of his economic reasoning, because it means in more ways than one, the end of society as we know it.

A). An incomplete analysis

A first point should be made that discussing the economic recovery and the techniques taken to do so and to encourage people to spend do only 50 % of the job if the original economic and ideological model is not criticized at the core.

We live in a mass consumption society. In this society, “pulling forward” demand is a condition for the existence of many companies (i.e., the need to create desires and cravings that people do not realize in the first place – cfr publicity or Apple who’s products have no other use than being nice and trendy).

That is just as “organic” as government stimulus can be: needs and demand created from scratch. Maybe, before questioning the governments efforts to jump-start the economy, we should inherently question the type of economy we want. “Pulling forward” when understood as creating inexisting demand is the very principle of the American society at heart. If you are against the government encouraging consumption, then you should similarly be against publicity and against the orgy of consumption which has been the great US plague during its credit bubble period.

If you do not recognize that there is something fundamentally flawed in the US model of society, then using government stimulus to help the demand recover and people buy even more, would make a lot of sense. Hence the concept of “organic growth”, is in itself questionable.

B). “Organic Growth”: an apocryphal concept

Here, we have to dispel some confusions often made by Denninger and his followers maybe by lack of economic theory. “Organic growth” is a financial term, designating “the process of business expansion due to increased output, sales, or both, as opposed to mergers, acquisitions, or take-overs”.

The use of the expression “organic growth” when talking about macro-economy is apocryphal and does not correspond to any valid economic theory.

C). The fallacy of the argument

It is one thing to maintain that increasing government spending is a politically irresponsible decision; it is another to oppose so-called “organic” growth and “artificial growth” based on “money being ‘given away’”.You cannot distinguish economic growth based on its origination, or then, you would have to discount 40 % of the US GDP at any given time (which would be a total fallacy, as I never hear Denninger complain of the “pulled-forward demand” in defense-related expenses, for instance, a sector which could not exist without government spending).

Courtesy of usgovernmentspending.com

It is all the more surprising to hear those arguments of “pulled forward” demand, as the same contributors never complain when tax cuts are budgeted. Tax cuts function exactly in the same manner, as they redistribute money from the State towards the citizens, but they have two drawbacks. First, a tax cuts, by essence will be an inequal distribution: they will privilege the richer citizens as only those who pay taxes will receive this “aid”  from the government, thus increasing social disparities. Second, in a Keynesian perspective, tax cuts are mostly saved and not spent, which is a serious inconvenience, when you’re trying to have economic fluxes flow again through the economy.

D). The contribution of government to economic activity

Hence, if we agree that Government spending can contribute to the GDP, and that there is nothing “artificial” about it (of course, libertarian maintain that each dollar spent by the government is one dollar less spent or used by the private sector), the issue of the legitimacy of using government funds for stimulating is solved.

It remains to question whether such spending is efficient on the long term. Here, we can only refer to past experiences of trying to maintain inefficient sectors alive under perfusion of government money, such as the steel sector in the 1970′s. In general, aid targeted at the economy or at various sectors fail to perform their objective, if the underlying issues are not solved first.

However, from a scientific point of view, some research would tend to indicate that in States where the government plays a large role in economic affairs, such as European states, there is evidence to show that growth performs better than in “wild capitalist systems”.

Which is logical, as although less performing, the economy takes less hits in crisis periods. The consideration for this higher security is a much more rigid society with less possibility of social evolution in both ways.

E). Conclusion:  Question the Society of Consumption!

See the article below for a scientific economic study the relationship between government spending and economic growth, especially in a context of market imperfections. So, yes, government spending can help the economy. Is it something to be wished for? That is a another debate, altogether.

I’ll give however a hint as to the answer: the conclusion is not what you would expect.

I do not encourage spending to create demand or spending to produce useless goods just to keep an economic machine going. Considering the limited resources the Earth can provide us with, we are consuming away our resources just to fulfill an endless and ever-growing thirst to possess, while neglecting our duties to the poorest among us and to the future generations.

I do question Denninger’s analysis (and to a degree Chuck’s) when he pretends to maintain this analysis within the framework of traditional classical economy ; In a way, Denninger does not go far enough in questioning the system, he complains about. I do stand for a mutation in the economic culture, where spending, having, using “less” is not always synonymous with something negative. And as an illustration: greenhouse gases have gone down thanks to this recession, and the cars bought thanks to “cash for clunkers” will consume less gas. Those are two positive externalities resulting from the current crisis.

Willing or unwilling, the US is about to learn the lessons and riches of frugality after a decade of orgy.

Government Spending and Economic Growth in a Context of Market Imperfections

Recent Posts:

• Taxpayers to the Rescue of Afghanistan Banking Crisis?
• Economic Data and Earnings Schedule for September 2 2010
• Christina Romer Makes a Final Recommendation Before Leaving To Teach Keynesian Economics
• Homebuilder Hovnanian (HOV) Reports Dismal Quarter
• Auto Sales Data for August 2010
• Stock Market Rewind – September 1, 2010