Germane to our post earlier today, this new paper by Valerie Ramey (she’s found similar results in the past, something I will write about later on) finds that government spending multipliers are less than one (i.e. for every dollar of government spending, less than $1 of new economic activity is created) and that while government spending creates employment, it does so by employing the folks who stand around watching one guy pave a highway:
Government Spending and Private Activity
by Valerie A. Ramey – #17787 (EFG ME)
This paper asks whether increases in government spending stimulate
private activity. The first part of the paper studies private
spending. Using a variety of identification methods and samples, I
find that in most cases private spending falls significantly in
response to an increase in government spending. These results imply
that the average GDP multiplier lies below unity. In order to
determine whether concurrent increases in tax rates dampen the
spending multiplier, I use two different methods to adjust for tax
effects. Neither method suggests significant effects of current tax
rate changes on the spending multiplier. In the second part of the
paper, I explore the effects of government spending on labor markets.
I find that increases in government spending lower unemployment.
Most specifications and samples imply, however, that virtually all of
the effect is through an increase in government employment, not
private employment. I thus conclude that on balance government
spending does not appear to stimulate private activity.
Note that this does still allow for some multipliers to exceed one. And note that this is not a study of what monetary stimulus might do.