How exactly does the government spending money stimulates the economy?

[Jalozyin]

I mean, if you think about it.. They should be saving the money, not spending it. If you spend it, you lose it, and thus the economy gets worse.

[Meg]

Since everyone's income is due to someone else spending if everyone saves more incomes fall and the economy gets worse. It is only when peoples saving are borrowed by businesses to spend on goods and services that make them more productive is saving more good for the economy.

[SDD]

It doesn't. You take money from taxpayers and spend it. But they then have that much less to spend themselves. Why on earth would anyone think this "stimulates" anything except your imagination?

[simplicitus]

ROTFL. No. The more you think about it, the more you realize the government should be spending more,
http://en.wikipedia.org/wiki/Fiscal_multiplier
http://delong.typepad.com/sdj/2010/06/we...s-now.html

especially on long term investments such as infrastructure and education:
http://delong.typepad.com/sdj/2011/02/di...y-act.html
http://innovationandgrowth.wordpress.com...ital-stock
http://voices.washingtonpost.com/ezra-kl...eal_i.html
http://phsa.theabramgroup.com/UserFiles/...report.pdf
http://dsp-psd.pwgsc.gc.ca/collection_20...03-11E.pdf
http://www.maxineudall.com/2010/08/the-r...paved.html

The U.S. used to be the best educated country in the world, with the most productive workforce, and the highest standard of living. No longer:
http://www.prosperity.com/
http://streetlightblog.blogspot.com/2011...r-two.html

[No Body]

One of the main reasons why government spending should stimulate the economy is that the government can (in theory) provide jobs that didn't exist before.

For example, let's say that as part of its effort to stimulate the economy, the government hires 10,000 people to dig holes in the middle of nowhere. The government also hires 10,000 other people to fill up holes in the middle of nowhere. Assuming the government is successful in hiring 20,000 people, you now have made 20,000 jobs and a whole new job market; hole digging. Ideally the private sector then takes over and makes the jobs permanent, so then the government can do something else with the money freed up.

Now the hole digging example is obviously fabricated because there are much better ways for the government to create jobs. Investing in infrastructure (roads, power plants, green energy etc.) is one good way. Also some jobs are created by permanent government spending, such as those in the military or tax collection.

A major caveat: The above is an example of how government spending should work. Unfortunately this is not always the case. For example, consider the fairly recent bailout of Fanny Mae and Freddy Mac. What jobs have been created/saved by this action? Aside from those directly employed, not many. Some other examples of government spending that do little for the economy include foreign aid and social security/medicare (though there are arguments that could be made in favor of universal health coverage positively affecting the economy). However note that much of the time spending that doesn't positively impact the economy is done for some other reason, usually humanitarian. Also some spending that doesn't seem to have a direct impact on the economy can have long-term positive impacts (education or pollution controls for example).

[RFS]

GDP is made up of the following components:

- Government consumption
- Private consumption
- Investment (which is nothing but the amount people, enterprises and governments are spending on production goods. the so-called fixed capital goods);
- Net exports (which is a measure of how much other nations are consuming goods produced in your country vs. the amount your country is consuming goods produced elsewhere).

In sum, GDP is only a measure of general spending. When spending falls, so does economic growth.

Suppose every year your government spends 1 billion dollars in the acquisition of computers to, say, conduct a census. By spending that money the government is stimulating the economy in the following ways: 1) it's increasing demand for industrial production; 2) more production may result in job creation; and 3) new jobs mean more people will have more money to spend (in a new car, a better school for the children, etc.).

If, for some unexpected reason, the government is forced to withhold spending in those new computers, industries will have to revise their profits estimates downwards, decrease production, and fire employees to save cash. And since more unemployment means people have less money to spend, other sectors of the economy might also be affected as a result since the number of consumers will shrink.

Bear in mind that what matters is the amount of money spent. Whether it is the government or the private sector that is consuming, is of no importance.

In general governments increase spending in times of economic crises. This is because during such periods people and corporations reduce their consumption levels to save more money out of fear for their future. When they do that - when they put more money in their bank accounts - governments borrow more from such banks and spend the money in new enterprises. During the 2008-2009 crisis China - in spite of decreased exports - kept its GDP growth steady. It managed to do that by boosting state-led investment in housing and infrastructure.

PS: Some people - the user below, for example - aren't answering the question based on science but instead on political slogans. You should ignore them.

[ibu guru]

You're right. All the Obummer Stimulus packages have done is increase debt. We cannot pay for a bit of it unless we slash the budget drastically. There has been no statistically discernible benefit or economic boost, not one "saved" or "created" job as result of Obummer Stimuli.

[Anjaree]

To spend it, is not to lose it.It is not a gambling,but investment. The multiplier magic will work.But if there are cheaters around, you would be right.