On the multiplicative effect of government spending (or any other spending for that matter)

TL;DR

This paper questions the assumed virtuous effect of government spending on economic growth, arguing it can be as ineffective or even harmful as private consumption if not properly restricted, based on economic principles.

Contribution

It provides a first-principles analysis showing government spending's limited or negative multiplicative effect on GDP, challenging common economic assumptions.

Findings

Government spending can be as virtuous as private consumption.

Unrestricted government spending may lead to depression and inequality.

The multiplicative effect of government spending on GDP is at most 1.

Abstract

There is, among the economist ecosystem, the idea of virtuous public spending as a form of promotion of economic growth. If we think on the way GDP is measured, it is not possible to get that conclusion because it becomes circular: measuring the money flow obviously will detect directly the public spending but always mixed with the flow of money from other sources. The question is how virtuous is public spending per se? Can it promote economic growth? Is there multiplicative effect in GDP bigger than 1? In this paper, we make use of the first principles of Economics to show that government spending is, at the most, as virtuous as private consumption and can be a source of economic depression and inequality if it is not restricted to fundamental services.