Tax Cuts, Not Government Spending, Good for Economic Growth
There is a good piece in yesterday’s Wall Street Journal on the effect of government spending on economic growth. The conclusion is that government spending does not “stimulate” the economy, or have a large “multiplier effect.”
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.
The full study is avaiable from NBER for purchase.