The theory is that money spent on public projects moves from one hand to another, that it generates more spending than the initial money spent. It is more than a theory, because it does work under ideal situations. In false situations where there is government corruption it does not work. When the government spends money there are three ways that it gets spent: 1) wages, 2) handouts and 3) projects.
Government wages is when the government pays people to do stuff for them and this is the largest way that governments spurn on the economy. In most countries in the West this amounts to Trillions of dollars. In Canada we have a progressive system of taxation, the first $43,953 is taxed at 15% and the second $43,953 is taxed at 22% and it goes on from there. We are also taxed by sales taxes and land taxes and a few other hidden ways like luxury taxes and cigarette and alcohol taxes meant t o reduce consumption. In Ontario the combined federal and provincial sales taxes come to 13% and municipal land tax is set by the municipality and is a percentage of the land's value.
My point is that a small wage automatically will see a large chunk of the money head directly back to the government as taxes. Then comes the next part, spending the money. People spend their money. They buy things, they get services and the eat things. Most of the things they buy have other people involved in the process. There are the sales clerks, the cashiers, the people that transported the material, the people that made the item, the people that dig or grow things, there are a lot of people that get a slice of the money spent. I think most people realize this.
Every dollar earned by someone gets split into a couple of pots, the tax pot and the spending pot and the savings pot. Savings are used for longterm or large purchases, whether it is retirement or saving to purchase a big ticket item, a car, a house or a trip. Given a long enough time frame, all money is eventually spent. The exception is the very wealthy, who typically buy more expensive everyday goods than the rest of the populous but also tend to get more money per time period than they spend it and so become the final resting spot of currency.
I work in a greenhouse, a green house with a landscaping arm. There are lots of cottages and such that need beautifying and servicing. This is one of the ways wealthy people spend money that other people don't. But we also have a greenhouse. We grow our own product. It supports about ten people with seasonal full time work. The biggest expense of the greenhouse are the wages of the employees. There are other expenses, heating, water costs, building maintenance, taxes and insurance. Oh the second biggest expense is purchasing of plant material. Like many greenhouses, we can't possibly grow everything we sell and not all our annuals are seeded, some are brought in via plugs and grown on to a larger size. A lot of our perennials are grown from plugs and bulbs/roots but a larger portion are brought in mature from a grower who has more space and more selection to grow the hundreds of possible perennials. Then there is the nursery. Out greenhouse does not have the space to grow the many different varieties and numbers of the trees and shrubs we sell, so we bring these in from somewhere where they are grown.
All told, the greenhouse is self sufficient, add the landscaping and it is making a profit which allows improvements to the buildings and extra money for the owner. So most of the money that the is spent locally, with some of the money going to external markets with their own set of employees and expenses.
The point is that money spent circulates until it reaches one of a few locations, the government through taxation, longterm savings of the public, things like education savings plans, RRSPs, and stuf like that, and money pits.
The first destination, the government, is good because this means that they can spend the money again. The second, long term savings, is only out of circulation for a period of time before it goes back into circulation, part of this money is taxed and goes back to the government. Part of it goes back into the economy though and is used by many people before it eventually ends up in the government again or in a money pit.
A Money Pit, is one of a few players that receive money and can't spend it. They can't spend it because there is nothing to spend it upon, so it just stops. It is like an economic Black Hole. There are many such pits. The most famous one is Walmart, the profits from each purchase disappear and never enter the economy again. When I say profits I mean, after paying for everything at Walmart, taxes, wages, building maintenance, product costs, advertising etc. there is some money left over that disappears. In our current system, this money is gone. It crosses boarders and vanishes.
Out there, somewhere, there is someone that knows how much each of these figures is, I don't, and sitting in Tim Horton's wasting time before I go to work, I don't have the inclination to look these up. But we could use hypotheticals and here-say. I heard that every dollar that a government spends is spent about five times before it ends its journey. If this is true, then that means a billion dollars of spending is creating a five billion dollar boost to the economy. If the total taxation that a person pays amounts to about half of their income, then that means most of the money that the government spends is returned to the government in taxes. Figuring out how much is going into money pits is a bit difficult. If one percent of every dollar spent ends in a money pit, then about five percent disappears, if it is higher than the more money out do every government expenditure disappears.
People like to say that government money spent just disappears, but there is always a trail and the money has been spent in at least one of a few ways. Handouts, the most efficient use of money that the government has. Handouts are almost universally given out to the poor or the working poor. It comes as workman's compensation, Employment Insurance, Welfare and charitable donations. Money goes to poor people and they spend it to acquire the necessities of life.
Welfare, there is a lot of myths about welfare, most of them are about how much money recipients get and about people defrauding the system. To be clear, welfare is not a way to get rich, it is a way to get poorer though. I was on welfare one year and it is really awful, this was about twenty years ago before they overhauled it and started to give people less money. I was getting $600 a month and that was before rent. For people's information it is really difficult to live on less than $300 a month for transportation and food. I walked everywhere when I was on welfare saving transit fare for really long trips. I was lucky I had friends that I lived with and rent was shared amongst us. A minimum wage job now would net you about $340 per month/10 hours a week you worked, but back then most of the jobs were 100% commission. My point is that welfare recipients, do not get a lot, and not nearly enough to build up savings, rather it was designed to exhaust your savings. But they spend everything they get when they get it.
EI is much the same, except it is the working poor who receive it and seasonal workers. Typically this means that they have higher expenses, a house, better rental property, people to support. Recipients save up money when they work and lose their savings to shortfalls in the winter. Getting a head is not something that happens with government handouts, recipients spend all there recieved moneys which improves the local economy. It pays rent, it purchases food and perhaps if there is a bit left over, it purchases clothing, maybe a bit of entertainment.
Workmen's Compensation pays the most it pays most of your wage that you made. It is where if there is fraud in the system, it is where most of it occurs because the lure is so high, but since there must be a injury to accompany the claim it is difficult cheat for most people.
Wages are the biggest expenditure, the government employs people to do things. It employs teachers, doctors, nurses, police officers, military people, bureaucrats and system maintenance people, so obviously the government employs a lot of people. Every government program has a group of government employees associated with it. Every government program has a set of ancillary employees employed as well, the people how manufacture the guns and munitions that the military and police use, people who make the uniforms, the bandages, the medicine, the paper that is used the buildings that they are in, everything. These people all get a wage from the government, or from the expenses of the government employing them.
Government employees and associated government employed, buy houses and cars and bicycles, they all purchase food and they all spend their money, most of their money. They are people that tend to have savings and investments, but most of their earnings come from the government and go directly back into the economy. The people the government employs pay taxes, the people that earn money supporting those government operations pay taxes, the money left that is spent by these people that goes into the economy pays the wages of people, who pay taxes.
A small amount of the money spent gets sucked up into the coffers of the money pits and disappears, but most of the money fuels the economy.
Grants and public projects are the last way that governments spend money to boost the economy. The money goes into infrastructure usually. The government drops a billion dollars to get a road built, subway or some other large project. The money is given to companies who then build the requested infrastructure. Materials are purchased, materials are changed and the natural environment is changed as something is built and then when it is done, there is a new building, a new roadway or a canal, subway, or airstrip; something that people can use, something that educates, something that opens up new routes. Something that theoretically helps the people of the region.
The money is spent on wages, materials and the rest goes to private interest, the organization that built the project. They use that money to pay for wages and to maintain equipment and they may pay dividends to shareholders and the owners of the company get a slice. It is the slice that goes to the high end administrators, the ones that receive giant bonuses, most of this money gets taxed or placed in longterm investments, but some of it disappears out of the economy forever.
My entire point of writing these thoughts was to highlight the importance to our economy of government employment, because many people see the money that government uses as a waste. They see the loss of 100,000 government jobs as a savings, as a cost cutting idea. They see the reduction of taxes to balance these expense savings as creating jobs. 100,000 jobs equals a billions less money spent on wages, a billions less money being spent, and a billions less being taxed, billions less moving between people's hands, less money in grocery stores and in their employee's hands. Decrease in taxation, means that there is a greater amount of money in owner's hand's, but do they spend that money? Do they increase people's wages? Do Walmart employees benefit, or do the increased profits end in the Walmart money pit? It is unquestionable that small business owners contribute more to the economy but is there a balance? 100,000 good paying jobs gone, a 100,000 more people relying on discount stores like Walmart.
How much of our economy is based on government spending?