Does Stimulus Spending Work?
After the housing bubble burst, both the Bush and Obama administrations turned to stimulus spending in an effort to improve U.S. economic growth. Stimulus spending is often justified by the thought that it is the government’s responsibility to create jobs. Proponents of the policy claim that an injection of government dollars will create jobs for people who will spend their new income and, in effect, create more jobs. Critics claim that because government money does not just fall from the sky, stimulus spending really just moves jobs from one place to another without creating actual economic growth.
What does the evidence say? Does stimulus spending work? Professor Antony Davies examines data on increases in federal spending and economic growth one year later. When this data is plotted on a graph, it is clear that there is no connection between federal spending and economic improvement. Instead, Professor Davies argues, the only thing stimulus spending does is make the budget deficit worse.
In the past three years, the Federal Reserve and federal government have injected the equivalent of two Canadian economies into the U.S. economy. Despite this stimulus, the unemployment rate remains 9 percent. “One thing that has changed,” says Davies, “is that our government is now $4.6 trillion further in debt than it was before the stimulus efforts.”
Following the bursting of the housing bubble both the Bush and Obama administrations attempted to jump-start the economy with stimulus spending. Stimulus spending is often accompanied by the phrase “the government must create jobs.” The theory is that every dollar the government spends is income for someone who, when he spends that income, provides income for another person. This is the Keynesian multiplier effect.
Critics argue that the multiplier effect overlooks the fact that the money the government spends doesn't fall from the sky. Every dollar the government spends it must obtain, either through taxing, or borrowing, or printing money. And where the government does these things, jobs are destroyed. In the end, the government doesn't create jobs at all, but, rather, moves jobs as it spends in one place and taxes somewhere else. People who claim that government spending creates jobs are only seeing half of the picture. Can this be true?
Let's look at the history of stimulus spending in the United States over the past half century. We’ll measure growth in federal spending along the horizontal axis and economic growth on the vertical axis. The blue dot is our economy at a point in time. The further to the right we go, the more stimulus spending we’re experiencing. The further to the left we go, the less growth in federal spending is occurring. Along the vertical axis we measure economic growth. The further up the graph we go, the more economic growth we’re experiencing. The further down the graph we go, the less economic growth we’re experiencing. We’ll place one dot for each quarter since the 1950s. If stimulus spending worked, we would expect to see a pattern of dots that moved up and to the right. When the government spends more money, we should see more economic growth. When the government spends less money, the economy should slow down. Now let's look at the actual data for the U.S. economy.
From 1955 to the present, government spending has risen in some quarters, fallen in others, and remained unchanged in others still. But what is clear is that there is no apparent positive relationship between government spending and economic growth. For example, in 1968 federal spending rose an average of more than 11 percent per quarter. One year later, economic growth averaged less than 1 percent per quarter. But in 1993, federal spending contracted an average of more than 2 percent a quarter. Yet one year later the economy grew at the same 1 percent per quarter. Of course there might have been something else going on in 1967 and 1993 other than federal spending that influenced economic growth, and that is why we look at all the quarters from 1955 to the present. Unless there was something atypical going on in every single quarter, we must conclude that there is no evidence here that increased federal spending results in economic growth.
What does this mean?
It means that the only thing stimulus spending does is to make the budget deficit worse. But it isn’t necessary to look at all this data; we need only look back over the past three years. Between the Federal- Reserve and the federal government we have injected the equivalent of two Canadian economies into the U.S. economy, and yet our unemployment remains stubbornly fixed at 9 percent. One thing that has changed is that our government is now $4.6 trillion further in debt than it was before the stimulus efforts.
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