Is government spending consumption or investment?

I return to an issue raised by Sinclair at the beginning of the day in his post on Welfare is consumption not investment. This is the confused notion economics now has about the nature of value adding and the role of saving. It goes further. Would modern economists recognise saving if it came and hit them in the eye and are they able to distinguish saving from public spending? It ought to be straightforward but it is not.

This is a knotty issue I find myself trying to resolve as I finish off a paper. It’s not that I don’t know what I think saving is. It’s whether there is a truly solid definition of saving so that economists will know what saving is. Is government spending officially part of consumption or is it part of investment, or is there a division, and if there is a division, how is the dividing done since most public “investment” is not market tested? That is, can government investment still be called investment even if there is no positive return or must it at some stage pay a dividend? This is the definition for “saving” that comes up first on Google:

According to Keynesian economics, the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income that he or she earns in a given period of time.

That is S=Y-C. Nothing new. Here’s the second one:

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through purchase of securities.

Once again, it is S=Y-C. The third one, though, is from The Britannica and there’s a name you can trust. This is more along the lines of what I am looking for since it begins to grapple with the actual issues:

Total national saving is measured as the excess of national income over consumption and taxes and is the same as national investment, or the excess of net national product over the parts of the product made up of consumption goods and services and items bought by government expenditures. Thus, in national income accounts, saving is always equal to investment. An alternative measure of saving is the estimated change in total net worth over a period of time.

It seems to bring in the notion that saving is a form of value adding spending which appeals to me. Which brings me to the passage I am trying to get right.

In a modern macroeconomic model, saving is enumerated in money terms and is seen as a negative, an absence, a failure to spend. National saving is defined as current money income in total less total money spent in the current period in non-value-adding ways. Saving can be seen as the difference between income and the level of unproductive demand, that is S=Y-(C+G), with Y, as usual, representing total income. The level of saving is then equal to the level of investment.

But this does not quite get to the Keynesian conception. First, C+G is made up of actual items of consumer goods and services plus government purchased goods and services. Perhaps complicating these issues further, saving traditionally is restricted to Y-C, with G net of transfers not entirely defined one way or the other, perhaps intrinsically conceived of as being as productive as business investment. It is possible that to properly make sense of modern economic theory, saving should be defined as Y-(C+G). It seems unclear where government spending fits into the notion of savings in a modern macroeconomic model.

Almost everything governments do seems to cost more than their return so I almost automatically think of saving as Y-(C+G). The more government spending there is, the less private investment. The notion that welfare spending is now even conceived in some quarters as part of industry policy seems to hasten us along the road to ruin. Is that now part of what all economists are taught to believe. Not my students, of course, but the rest? If that is how it is, economic theory is in an even worse state than I thought.

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