The Keynesian approach to economic policy says to increase government spending during recessions so as to stimulate the economy.
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1 The Keynesian approach to economic policy says to increase government spending during recessions so as to stimulate the economy. Historically, how has the economy performed at different levels of government spending?
2 RGDP per Capita Growth Stimulus Spending and Economic Growth If stimulus spending worked, we would expect to see a relationship like this. 4% 3% 0% -6% -4% - 0% 4% 6% % -4% Change in Federal Outlays as % of GDP If stimulus spending worked, as Federal spending grows, the economy should grow also.
3 What does the historical data look like?
4 Stimulus Spending and Economic Growth ( to ) Increased government spending does not appear to increase economic activity. 4% 3% RGDP per Capita Growth 0% -6% -4% - 0% 4% 6% % -4% Change in Federal Outlays as % of GDP Data source: Bureau of Economic Analysis, National Income and Product Accounts
5 Maybe government spending takes time to impact the economy. How does government spending this year affect economic growth next year?
6 RGDP per Capita Growth 1 Year Later Stimulus Spending and Economic Growth ( to ) 4% 3% 0% -6% -4% - 0% 4% 6% % -4% Change in Federal Outlays as % of GDP Data source: Bureau of Economic Analysis, National Income and Product Accounts Government spending today does not appear to increase economic activity one year in the future.
7 What about the effect of government spending on economic growth two years in the future?
8 RGDP per Capita Growth 2 Years Later Stimulus Spending and Economic Growth ( to ) 4% 3% 0% -6% -4% - 0% 4% 6% - - Data source: Bureau of Economic Analysis, National Income and Product Accounts Government spending today does -3% not appear to increase economic activity two years in the future. -4% Change in Federal Outlays as % of GDP
9 Maybe the effect of stimulus spending is cumulative. What is the effect of cumulative government spending on cumulative economic growth?
10 RGDP per Capita Growth (4QMA) Stimulus Spending and Economic Growth ( to ) 3% 0% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% Change in Federal Outlays as % of GDP (4Q Moving Average) Data source: Bureau of Economic Analysis, National Income and Product Accounts Government spending over the past 4 quarters appears to have a negative effect on economic growth over the past 4 quarters.
11 Maybe the negative relationship is due to the fact that the government spends more during recessions. What is the effect of cumulative government spending on cumulative economic growth one year later?
12 RGDP per Capita Growth 1 Year Later (8QMA) Stimulus Spending and Economic Growth ( to ) 0% -0.6% -0.4% % % 0.6% 0.8% 1.0% - Government spending over the past 8 quarters appears to have a negative effect on economic growth over the 8 quarters one year in the future. - Change in Federal Outlays as % of GDP (8Q Moving Average) Data source: Bureau of Economic Analysis, National Income and Product Accounts
13 How can this be? Government spending doesn t create wealth, it moves wealth from one part of the economy to another. To pay for its spending, the government has to borrow, raise taxes, or print money. These activities tend to destroy more jobs than the subsequent spending creates. Stimulus spending is like trying to fill a pool by drawing water from one end of the pool and pouring it into the other.
14 Even if stimulus spending did work, it would still be useless as a policy tool because the government can t get its timing right.
15 Line up all the past recessions and note when they end.
16 Growth in Per Capita Real Federal Spending (annualized) 0% % -4% -5% -6% Line up all past recessions so that they all start here. t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 25% of recessions are over by this time. 50% of recessions are over by this time. 75% of recessions are over by this time. -7% Quarter Relative to Recession that Began in Quarter t Data sources: Bureau of Economic Analysis, National Bureau of Economic Research. Quarterly data, 1947 through 2009.
17 Now, compare when the recessions start and end to changes in government spending that was occurring at the same time.
18 The Government Can t Get Its Timing Right Growth in Per Capita Real Federal Spending (annualized) 0% % -4% -5% -6% -7% Line up all past recessions so that they all start here. t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 25% of recessions are over by this time. 50% of recessions are over by this time. Quarter Relative to Recession that Began in Quarter t 75% of recessions are over by this time. At the height of recessions, the government (on average) is contracting spending. Data sources: Bureau of Economic Analysis, National Bureau of Economic Research. Quarterly data, 1947 through 2009.
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