It takes an economist to say something so stupid that the whole world is dumber for having heard it. Put a group of economists together and ask them what they think about government spending and you get a colossal stupidity that instantly makes the whole nation stupider.

If manufacturing is hurting the economy, and the dollar remains strong, perhaps the country needs more government spending. That's the kind of absurd conclusion an economist paid by one of the major banks would probably make. Let's remember, bank economists are in the business of promoting credit growth.

But motives aside, the best explanation for a recent quarterly survey of Australian bankers is that they're ignorant about what creates wealth. 'Surplus would cost us dearly: economist's survey,' is the headline of an article in today's Australian Financial Review. In the article, one respectable economist after another warns that if the government returns to a surplus too quickly, the economy will suffer.

'The too-rapid achievement of a surplus would make conditions even weaker at home, placing further pressure on monetary policy to offset its effects on economic growth,' drones one economist. Three of the economists surveyed predict the government's 2013 deficit will be greater than $20 billion. One reckons it will be at least $25 billion. Most of them warn that if the government lives within its means, it will mean lower GDP growth.

In formulaic terms, they're all right. GDP is a simple calculation. You take private spending, you add government spending to it, you add gross investment and then you add or subtract the difference between imports and exports. If you run a trade surplus, the difference is an addition. If you run a trade deficit, the difference is negative.

In formulaic terms, lower government spending does lead to lower GDP growth. This is why the Krugmanites of the world are against austerity. They see the economy as an equation. If you lower spending in any one part, the total will be lower. When private sector spending falls because of deleveraging, their answer has been an increase in government spending.

What the GDP formula lacks is some good old fashioned discrimination, otherwise known as common sense. The government doesn't spend money well. It usually just moves it from someone who produces wealth to someone who consumes it. The GDP figure measures the quantity of activity, but not its quality.

Economists warn us that if governments spend less, we'll be less well off. But if governments lived within their means (balanced the budget) they'd have to lower spending. Less spending would leave more money in the pockets of ordinary people. Those people could spend it, invest it, or save it, where it becomes loanable funds in the banking system.

When the government runs structural deficits, it sucks out money from the financial system that could otherwise be doing something productive. Instead, it's usually moved around in transfer payments to people who spend the money on consumption rather than on investment or saving. The 'cash splash' pumps up the GDP figures but doesn't create any real wealth.

Only a moron or an economist would believe that a nation should run government deficits in order to become wealthy. It's not just a world view or a frame of mind to think so, it's some kind of mental retardation that comes from living your life in a theoretical world and not in the real world.

Deficits matter. Australia is running them. The economists are encouraging it. The economists are blockheads. Will this numbskullery cost investors? More on that tomorrow.

Regards,
Dan Denning
for The Daily Reckoning Australia