The Corner

More Data on the Impact of Government Spending on Growth and Employment

A new paper by economist Valerie Ramey of University of California–San Diego looks at the impact of increased government spending on private activity and employment. Here is what she finds:

  • Can an increase in government spending stimulate the economy in a way that raises private spending?

Ramey finds that in most cases, private spending falls significantly in response to an increase in government spending. She finds that in general the multiplier is less than 1. However, she also warns that these results may not be necessarily applicable to the current debate, since part of the increase in government spending is financed by an increase in tax rates.

  • Can an increase in government spending raise employment and lower unemployment?

Her works shows that increase in government spending lowers unemployment, but only because in most cases it increases government employment. She writes:

However, I find the surprising result that in the great majority of time periods and specifications, all ofthe increase in employment after a positive shock to government spending is due to an increase in government employment, not private employment. There is only one exception. These results suggest that the employment effects of government spending work through the direct hiring of workers, not stimulating the private sector to hire more workers.

Ramey’s work on the impact of government spending on the private sector and employment is consistent with the work of many other economists. For a fascinating and balanced discussion about the impact of government spending on the economy and more, I would recommend listening to this interview of Ramey by George Mason University’s Russ Roberts.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

Most Popular

Film & TV

A Sad Finale

Spoilers Ahead. Look, I share David’s love of Game of Thrones. But I thought the finale was largely a bust, for failings David mostly acknowledges in passing (but does not allow to dampen his ardor). The problems with the finale were largely the problems of this entire season. Characters that had been ... Read More
Politics & Policy

The Great Misdirection

The House Democrats are frustrated, very frustrated. They’ve gotten themselves entangled in procedural disputes with the Trump administration that no one particularly cares about and that might be litigated for a very long time. A Washington Post report over the weekend spelled out how stymied Democrats ... Read More
World

Australia’s Voters Reject Leftist Ideas

Hell hath no fury greater than left-wingers who lose an election in a surprise upset. Think Brexit in 2016. Think Trump’s victory the same year. Now add Australia. Conservative prime minister Scott Morrison shocked pollsters and pundits alike with his victory on Saturday, and the reaction has been brutal ... Read More
NR Webathon

We’ve Had Bill Barr’s Back

One of the more dismaying features of the national political debate lately is how casually and cynically Attorney General Bill Barr has been smeared. He is routinely compared to Roy Cohn on a cable-TV program that prides itself on assembling the most thoughtful and plugged-in political analysts and ... Read More