One thing that the Austerians are fond of saying is that government spending doesn't increase production in an economy, it just retargets production from the private market to the government market. They have an accounting formula that "proves" this -- an accounting formula that conveniently disappears slack resources, unemployed people and idle factories (or, rather, their formula claims that such are impossible to exist -- ignore our lying eyes, those unemployed slackers aren't unemployed, they're just taking a long vacation!).
Of course, this ignores the fact that we only count as unemployed those who are looking for work -- i.e., people who are *not* taking a long vacation (they wouldn't be looking for work if they were vacationing!) -- and that the current stats show a *lot* of idle resources all over that could be put to productive use if there was demand for the goods. Joe the Sandwich Shop owner, looking gloomily at his empty shop, isn't making sandwiches. But if someone came in and wanted a sandwich, he'd make one for that person. Duh.
So what creates demand? Well... money, and the willingness to spend it. And it doesn't matter, from the viewpoint of the economy, whether that money is "government" money or "corporate" money. If Joe the Sandwich Shop Owner sees someone come in his shop with the money to buy a sandwich and the desire to buy a sandwich, he's going to make a sandwich for that person -- a sandwich which did not exist until Joe produced it. And Joe's going to do this regardless of whether the guy who wants the sandwich was paid with "government" money or "private" money, money is money, from Joe's perspective -- he's a businessman, not a theologian or ideologue, he's in business to sell sandwiches, not to query people about where they got the money to buy his sandwiches.
Now, one argument is that the government can only spend by taking money away from other people that would otherwise be used for consumption. That ignores the fact that the Fortune 500 has literally stuffed $2 *TRILLION* under a mattress -- it's just sitting there, consuming *nothing* -- that could be taxed without reducing consumption by one iota, but also ignores the fact that the government possesses this wondrous invention the printing press and thus could actually print the money that it intends to spend. Now, mind you, this has to be done cautiously since hyperinflation can cause Joe to not sell sandwiches too (because he can't haul wheelbarrows full of cash to his suppliers fast enough to get the stuff to make sandwiches before it inflates to worthlessness), but hyperinflation is a worry only under certain circumstances that don't exist at present.
So the government *can* increase consumption without reducing consumption elsewhere, and thus *can* increase actual production of goods and services. Joe the Sandwich Shop Owner produced one more sandwich because the bridge builder who had been paid with freshly printed government stimulus money bought a sandwich there. That sandwich is increased production of goods and services that otherwise wouldn't exist. And if you say otherwise, Joe will just look at you like you're some crazy-ass lunatic and point you at the fresh green in his cash register and say "what, are you a fucking moron? You think that government dude gave me this money just 'cause he liked my fucking face? Get outta my shop, asshole!" Multiply by thousands of Joe the Sandwich Shop Owners, not to mention steel mill workers now working because of all the steel needed to build that bridge paid for by government money, and so on and so forth, and you have a significant difference. *IF* the government consumption is big enough to make a significant difference. If not... (shrug). You get today's economy, where increases in federal government consumption have been offset by a collapse of state and local spending as their tax revenues dive. Just another reason why WASF.
-- Badtux the Economics Penguin