Thursday, November 3, 2011

"Zero" Effect of Government Stimulus Spending over 50 Years

Nothing is more important than understanding whether particular sets of government spending actually "solve" the problems they are supposed to fix. The reasons are hugely significant, such as whether certain government policies can "help" get an economy out of recession, and "merely" important as matters of good public policy, including the charge not to waste huge amounts of taxpayer-supplied revenue.

The problem is that there is arguably much more disagreement among economists about macro-economic policies than about micro-economic policies. And though not everyone will agree, a study of 50 years worth of government spending by economists at the Phoenix Center for Advanced Legal and Economic Public Policy Studies finds that such spending has “zero” effect on private-sector job creation.

“During periods of economic sluggishness, we find that government spending has zero effect on private-sector job creation,” the report suggests. “This result is consistent with the apparent impotence of huge federal government spending increases  aimed at reducing unemployment.”

In contrast, when it comes to job growth,  expansions in private investment are
effective in both regimes, but its efficacy is greatest during economic stagnation, the study authors say.

By implication, policies that discourage private investment may have severe job-killing effects during economic downturns, since it is during the low growth periods that private investment is most effective at creating jobs. Spending has no impact

The effects on (various measures of) economic activity of government spending and private investment have been studied by economists for decades, and while the economic stimulus effects of private investment are unquestioned, the effects of government spending on labor markets remains an open empirical question, the study says. That might come as a surprise to some who believe the impact of massive government spending during recessions are effective.

In our earlier work on the influence of regulation on job creation, titled Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study, we found that even a small across the board five percent reduction in the operating budgets for all federal regulatory agencies (about $2.8 billion) would result in an increase in employment by 1.2 million private-sector jobs annually, growing private-sector GDP by about $75 billion each year, the authors say.

“Put differently, eliminating the job of a single regulator grows the American economy
by $6.2 million and creates nearly 100 private-sector jobs annually,” the study says.

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