Government Spending Does NOT Stimulate the Economy.
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Government Spending Does NOT Stimulate the Economy.
by Cacophonous Sun Jul 18, 2010 9:03 am
Government Spending Does NOT Stimulate the Economy.
No revelation in that, of course, to anyone outside Washington.
But there have been claims - even by some on conservative fora - that Defense spending is good for the economy, and this paper addresses that.
I saw one of the authors of this study - Veronique de Rugy - on C-SPAN addressing the topic of the stimulus bill, and later saw testimony from Christina Romer (one of BO's economic advisers, and one who reminds of an underqualified first grade teacher on helium and shrooms...more on her later) and was fascinated by the contrasting messages.
Anyway, the attached summarizes research by Harvard professor Dr. Robert Barro and Charles Redlick, who analyzed defense spending as a means of viewing the effectiveness of Washington's use of the spending multiplier, which is supposed to measure the impact on the economy of government spending. They used defense spending because defense spending is not based on the state of the economy (it is driven by non-economic factors) and is therefore a good control; changes in defense spending are very large and include sharply positive and negative values; and the historical data on defense spending covers periods
of high unemployment, so they should reveal whether government spending creates increased economic growth in a slack economy.
They concluded that defense spending (and therefore all government spending) does NOT create economic growth, and when combined with tax increases does serious damage to the economy. They also cited a study co-authored by no less than Christina Romer that looks at the impact of tax cuts on the economy and concludes that the tax multiplier is about 3; i.e., $1 of tax cuts raises GDP by about $3.
So the natural conclusion - for me - is that neither spending cuts nor tax cuts alone will stimulate the economy, that we need both. And the spending cuts should be focused on those spending initiatives that are driven by economic factors (i.e., social programs).
Interesting read:
http://mercatus.org/sites/default/files/publication/MOP77_SBI_Spending%20Multiplier_web%20%282%29.pdf
No revelation in that, of course, to anyone outside Washington.
But there have been claims - even by some on conservative fora - that Defense spending is good for the economy, and this paper addresses that.
I saw one of the authors of this study - Veronique de Rugy - on C-SPAN addressing the topic of the stimulus bill, and later saw testimony from Christina Romer (one of BO's economic advisers, and one who reminds of an underqualified first grade teacher on helium and shrooms...more on her later) and was fascinated by the contrasting messages.
Anyway, the attached summarizes research by Harvard professor Dr. Robert Barro and Charles Redlick, who analyzed defense spending as a means of viewing the effectiveness of Washington's use of the spending multiplier, which is supposed to measure the impact on the economy of government spending. They used defense spending because defense spending is not based on the state of the economy (it is driven by non-economic factors) and is therefore a good control; changes in defense spending are very large and include sharply positive and negative values; and the historical data on defense spending covers periods
of high unemployment, so they should reveal whether government spending creates increased economic growth in a slack economy.
They concluded that defense spending (and therefore all government spending) does NOT create economic growth, and when combined with tax increases does serious damage to the economy. They also cited a study co-authored by no less than Christina Romer that looks at the impact of tax cuts on the economy and concludes that the tax multiplier is about 3; i.e., $1 of tax cuts raises GDP by about $3.
So the natural conclusion - for me - is that neither spending cuts nor tax cuts alone will stimulate the economy, that we need both. And the spending cuts should be focused on those spending initiatives that are driven by economic factors (i.e., social programs).
Interesting read:
http://mercatus.org/sites/default/files/publication/MOP77_SBI_Spending%20Multiplier_web%20%282%29.pdf
Cacophonous- Posts : 16
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Join date : 2009-08-29
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