You Get What You Pay For

At first glance, there would appear to be little economic difference between government purchases and transfer payments, because in each case the government writes a check. When the check goes to a person for building a fighter plane or highway, it’s called a purchase; when the government writes a check to an unemployed person it’s called a transfer. In each case, government must tax or borrow to finance the payment.

However, the economic effects of purchases and transfers are quite different. Government checks written for purchases of equipment, roads and so on are payments contingent on work and production: the people cashing the checks received them by virtue of producing something the government values. Moreover, all people use the roads, schools, parks and other projects built by the government.

In contrast, people cashing transfer checks are not required to produce anything and, as with unemployment insurance, receive them because they are not producing anything. People who produce too much are ineligible for such payments.

Economists have found that the government gets what it pays for. When it pays people to produce, a number of people accept that offer, and the economy is larger as a result. When government pays people for not producing, a number of people accept that offer by working or earning less, and the result is a smaller economy.

The American Recovery and Reinvestment Act included purchases and transfers. The transfers served to shrink the economy, while the purchases may have expanded it.