OK research shows govt stimulus spending useless

dogtowner

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not that this was ever in question but still....

tax cuts on the other hand....


I'll talk about a few of these topics in coming days, but let's start off by rehashing the battle over whether the 2009 stimulus bill--ARRA, the American Reinvestment and Recovery Act--really worked. I'm not talking about the tax cuts--I'm talking about the spending: green jobs, new government buildings, health clinic staffers. With my coauthor Dan Rothschild (now at AEI) I wrote two papers last year on the stimulus for the Mercatus Center at George Mason that got me thinking quite a lot about this.

The Keynesian theory of stimulus is elegant: When a recession needlessly throws people out of work, the government can hire them, and then those people take their paychecks and buy stuff made in the private sector. So it's a win-win: The government and the private economy both expand. No cruel tradeoff: the pie is bigger than before, there's a "multiplier effect." I imagine Keynes genuinely loved the thought of saving his beloved market economy.

So, how often does it work out that way? Well, Valerie Ramey of UC San Diego (FD: one of my dissertation advisers) has looked at the major studies and written some of her own, and in a new article she concludes that in the U.S., "on balance government spending does not appear to stimulate private activity." Yes, it boosts government hiring--and lowers the unemployment rate--so on average you're getting a free lunch there. But Faberge shampoo-style stories you read about in freshman economics texts where "he spends money at her store, and she spends money at another store, and so on, and so on" just doesn't seem to show up in the real world.

You might think, "Textbooks don't really claim that government spending sets off waves of private-sector spending---that's just a caricature." But I've got a textbook right in front of me--Schiller/Hill/Wall, in its 13th edition so it must have moved some product--and they talk about a multiplier of 4: One dollar of government spending sets off three dollars of private spending. If that's how the real world works, let's double the Department of Defense.
 
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It just amazes me what they spent some of the stimulus money on in my local community... I can only hope that once it runs out, those projects are defunct or are being managed by a more competent leader (which is sadly unlikely).
 
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