Debate Desk
Is Government Spending What Drives Economic Growth in America?
Spending moves money from one pocket to another; growth comes from investment, work and innovation, and the stimulus record shows the limits of the idea.
The claim
Keynesian economists argue that when private demand falls, government spending fills the gap, and that each dollar spent returns more than a dollar in activity through a multiplier. In a downturn, they say, a large stimulus keeps workers employed until the private sector recovers.
The answer in three points
- Government has to take money from taxpayers or borrow it before it spends it. The dollar spent is a dollar not spent elsewhere, or a claim on future taxes. The jobs created by a project are visible, and the jobs lost because the money was taken are not.
- Lasting growth comes from more workers, more capital per worker and better ideas. Spending that builds a useful road adds to capacity, while spending that only pays for consumption does not.
- Stimulus has a mixed record. Some of the money arrives after the downturn has ended, projects are not as shovel-ready as promised, and the debt left behind has to be paid.
The right test of any dollar of public spending is whether it buys something worth more than what was given up. Public goods such as roads, courts, defense and basic research pass that test often. Programs that only move income from one group to another rarely add to the size of the economy. Counting jobs created without counting the cost is accounting by half, and families who pay the other half deserve the full ledger.
A simple habit helps here. When someone proposes a program, ask what the same money would do if it stayed with the family or the firm that earned it. If the answer is that it would be saved and invested, the program must beat that return to be worth its price.
The numbers
- The Obama administration's January 2009 forecast projected that unemployment would peak near 8 percent with the stimulus, and the Bureau of Labor Statistics later recorded 10 percent in October 2009.
- The American Recovery and Reinvestment Act of 2009 was scored by the Congressional Budget Office at about $787 billion over the budget window, according to the CBO's 2009 estimate.
- Research cited by the Congressional Budget Office gives a wide range for the multiplier, which shows the lack of agreement.
What they will say next
"The economy would have been worse without it." That claim cannot be tested, because we do not see the other world. It is a defense that can be used for any result, and a forecast that is missed should count against the model.
"Spending in a deep downturn is different." Perhaps. Even then, the form of the spending matters, and permanent programs are hard to reverse. Temporary, timely help to households is better than long projects.
"Infrastructure is an investment." Some is, and those projects deserve scrutiny by cost and benefit. Washington's habit of attaching rules that raise costs and slow work weakens the return.
"Austerity deepened downturns in Europe." The record is mixed, and the countries that cut spending and those that raised taxes had different results. A country that borrows heavily in a boom has little room in a bust. The lesson is to restrain spending when times are good so there is room when they are not.