Why do people say stimulus is a zero sum game? For example in the US when the government does a stimulus, it borrows the money and people argue that when they borrow 800bb, that is taking money out of the private sector that would be spent by the private sector to help growth. However.....when the US borrows money they borrow from China......not its own citizens so I dont follow this argument. Please help me understand.

It's because the government will need to increase future taxes (on the private sector) to repay China.

It is also important to remember what the government is spending the stimulus on. if the government spends 1$ on domestic resources (i.e. labour, materials, capital) that is 1$ that the private sector cannot use for its own purposes. there is a fixed amount of labour and capital for a given unit of gdp, rendering the financing of the defect a moot point. In theory the government could use the deficit entirely to finance imports on non locally produced goods (i.e. buy lots of oil) or reduce taxes on the private sector but in practice most of the deficit is government consumption of domestic goods(teachers salaries, Medicare, military, etc).

QuoteOriginally posted by: Traden4AlphaIt's because the government will need to increase future taxes (on the private sector) to repay China.This is not true if the stimulus creates real economic growth, which will create new jobs, expand the tax base, and thus have no need to increase taxes.

QuoteOriginally posted by: honeyoak87It is also important to remember what the government is spending the stimulus on. if the government spends 1$ on domestic resources (i.e. labour, materials, capital) that is 1$ that the private sector cannot use for its own purposes. there is a fixed amount of labour and capital for a given unit of gdp, rendering the financing of the defect a moot point. In theory the government could use the deficit entirely to finance imports on non locally produced goods (i.e. buy lots of oil) or reduce taxes on the private sector but in practice most of the deficit is government consumption of domestic goods(teachers salaries, Medicare, military, etc).can you explain the following in a little more detail........perhaps with some examples"if the government spends 1$ on domestic resources (i.e. labour, materials, capital) that is 1$ that the private sector cannot use for its own purposes. there is a fixed amount of labour and capital for a given unit of gdp, rendering the financing of the defect a moot point."

Sure. Lets say that the local government wants to build a bridge and they fund that with bonds paid by foreign investors. to build a bridge it takes a few things, labour (i.e. people to build the bridge) capital (i.e. equipment used to build the bridge) and materials ( steel, concrete, etc.). by funding the government program the foreign investors are saying :"hey i know you cant pay me now with goods of your own for these awesome goods that we make, so we will take an OIU on those goods that you promise to make us in the future". now of course there are other business besides government in this local town. lets just say that this town has a bottle cap factory. equipment in that factory needs to be constantly maintained in order for it to be running effectively. the factory owner has a problem though. the local government, has in fact taken all the local skilled craftsman to build the dam bridge. therefore he will have to raise the wages that he pays to these workers to bring them back into the maintenance of the factory. this is the zero sum game that people talk about.hope that helps

QuoteOriginally posted by: rmb623QuoteOriginally posted by: Traden4AlphaIt's because the government will need to increase future taxes (on the private sector) to repay China.This is not true if the stimulus creates real economic growth, which will create new jobs, expand the tax base, and thus have no need to increase taxes.First, that assumes that the government is a wise investor whose investments earn more than the government's cost of capital. That's highly debatable given the % of stimulus spent on consumptive activities vs. true invetsments. Second, it also assumes no competition for capital between public and private uses of capital -- that the Chinese investing $X billion in the U.S. government didn't mean $X billion less invested in other private-sector investments.Third, even if the stimulus creates growth that repays the deficit, the borrowing still implies the need for increased tax revenues. Had the private sector made the investments that created growth, then the government could maintaining constant revenues by reducing tax rates.Finally, there's a second order effect in which the $800 billion deficit increases the interest rates on the accumulated $12 trillion debt when that debt gets rolled. Thus, the effective interest on the $800 billion is much more than i*$800 billion, it's i*$800 billion + ∆i*12,000 billion. See the experiences of Southern European countries for an object lesson in incremental deficit spending creating unsustainable rates on the accumulated debt.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: rmb623QuoteOriginally posted by: Traden4AlphaIt's because the government will need to increase future taxes (on the private sector) to repay China.This is not true if the stimulus creates real economic growth, which will create new jobs, expand the tax base, and thus have no need to increase taxes.First, that assumes that the government is a wise investor whose investments earn more than the government's cost of capital. That's highly debatable given the % of stimulus spent on consumptive activities vs. true invetsments. Second, it also assumes no competition for capital between public and private uses of capital -- that the Chinese investing $X billion in the U.S. government didn't mean $X billion less invested in other private-sector investments.Third, even if the stimulus creates growth that repays the deficit, the borrowing still implies the need for increased tax revenues. Had the private sector made the investments that created growth, then the government could maintaining constant revenues by reducing tax rates.Finally, there's a second order effect in which the $800 billion deficit increases the interest rates on the accumulated $12 trillion debt when that debt gets rolled. Thus, the effective interest on the $800 billion is much more than i*$800 billion, it's i*$800 billion + ∆i*12,000 billion. See the experiences of Southern European countries for an object lesson in incremental deficit spending creating unsustainable rates on the accumulated debt.That doesnt assume what you claim. The statement starts with "if". your #1 is a mute point. it doesnt matter if the government is a wise investor. if whatever the government does with the money creates real economic growth, then we are better off. they key here is real economic growth, not artifical.#2 when was the last time the Chineese government invested $x billion directly into the US economy? why would they when they can invest quite safely in their own economy buying US treasuries.#3 so what.#4 this doesnt pertain to zero sum game....perhaps negative sum.....if there is such a thing.

honeyoak thank you for the example. so now begs the question.....what is the counter argument to this zero sum game. it seems like this seems logical in theory but in practice is it really so.....especially in an economy as complicated and dynamic as that of the US? wouldnt most of the "bridge development" be done by individual construction and engineering companies who have their own labor? sure they may hire a few addittional workers from the bottle cap comany, but not enough to make any meaningful impact.