Economic Growth

by Elaine Schwartz    •    Jul 19, 2010    •    790 Views

Did someone once say, where you look determines what you see? For evaluating the impact of federal spending, perhaps that is the problem.

Some economists emphasize the connection between federal spending and the change in GDP (national production). Mathematically, they say, “Look, we spend one dollar and then national production increases by $2. The reason is the new spending that was created.” Government could build a road, then workers are paid, they buy computers and cars, still more workers receive additional wages, which they spend, and so on. The result would be the multiplied impact of the first dollar spent by government–the goal of the 2009 stimulus package. One economist, during Senate testimony, said that the type of spending or tax cut determines the change in GDP. Citing his “Bang For the Buck Chart,” he said that the ripple of spending during one year is especially magnified when government extends unemployment benefits.

A trio of Harvard researchers looked at spending through a totally different lens. They focused on the connection between congressional spending and business investment. Looking at congressional districts to which powerful members of congress directed federal dollars, they found that businesses responded by doing less. Why? They hypothesized that government took over what business would have done, government created uncertainty, and government attracted employees.

As you might have predicted, the first economist recommended more government spending while the second group had the opposite conclusion.

The Economic Lesson

Explained by economist John Maynard Keynes during the 1930s, the government spending multiplier is a controversial concept. Believed by some and condemned by others, it contends that government spending can “prime the pump” and stimulate the private sector when a nation is experiencing an economic contraction.

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