Question

what are the advantages and disadvantages of government spending on public works, as compared with transfer payments, as a means of alleviating a trough?

Answer 1

There are advantages of government spending on public works, in comparison to the transfer payments. The first advantage is that it creates jobs in the economy that fuels the economic growth, whereas the transfer payment is meant to provide relief for a time being and it is not a permanent solution. The second advantage is that government spending creates derived demand for many other industries that also start producing and creating employment. It is a way, to solve the problem of poverty, unemployment and other issues. But, transfer payments are issued to a particular group of people and will not give long term solution to the problems faced by people. Further, unemployment benefits as transfer payments, make people to reject jobs with lower wages and creates problems in the job market where jobs are available, but people don't want to join work due to wage getting lower than the unemployment benefits. Such problems are resolved when government spending and subsequent job creation takes place.

Though there are disadvantages as well. The first disadvantage is that government spending has lag effect and it will take time to deliver the benefits, whereas transfer payments deliver immediate benefits. Further, government spending creates crowding out effect that mat cause private spending to decrease, hence nullifying the benefits with loss. But, transfer payments can work as automatic stabilizers and economy can be revived as per the classical point of view. It is another disadvantage of government spending.