Econ 101 – Government Spending

In the first year of macroeconomics I don’t think there is a single student who doesn’t leave with some understanding of fiscal and monetary policy. One controlled by legislators and the other by central bankers. Furthermore, even an elementary reading of Keynes or a brief quote in a textbook makes it clear that government spending (a component of GDP) can be an effective way to encourage growth. Although there are negative effects like crowding out private investment and national debt, the argument goes that these temporary short term problems are worth the long term stability hopefully spurred by government intervention.

The lesson that reality has shown is that there is only an extremely weak multiplier effect for government spending, meaning a dollar spent by the government does not spread throughout the economy in the way originally modelled by Keynes. Moreover and a lesson made clear from the 2009 stimulus bill – getting legislators to allocate money quickly and then spending it is nearly impossible. The tendency is for government spending to dovetail recoveries. This seems to be what is happening now:

The approach this week of the stimulus program’s one-year anniversary sparked a fresh round of dueling partisan statements, as Democrats sought to credit the effort with averting a deeper recession and Republicans said the program deserved a failing grade. But in terms of spending, the stimulus is largely incomplete.

As the economy is recovering, the influx of the majority of the U.S. stimulus money will make the recovery look stronger and more swift than it would be absent extra government spending.

Related posts:

1. Barney Frank Gives Us a Picture of a Democratic Government
2. The Not-so Stimulating Stimulus
3. Obama Administration Sheds 500,000 Jobs
4. 2009 Q4 GDP Statistics
5. What Have Governments Learned from the Financial Crisis?