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May 22, 2012

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Luis Enrique

further on the "type of spending" point, careful empirical work tends to find that higher government spending of certain categories (so called productive expenditure) is associated with higher growth.

see here

http://www1.worldbank.org/publicsector/pe/pfma06/CJE.pdf

[also a lot of empirical work is shoddy in this realm, as the paper above argues, regressions are often misspecified]

Andrew

Great post.

A macroeconomist who recognises that detail matters and mechanisms vary with time and place. Wonderful.

Woj

I second Andrew's comment. The debate on stimulus versus austerity too often obscures the details of how public funds are actually spent. Hopefully people will start to follow your lead.

Matthew Sinclair

Thanks Chris, interesting post. I included a simple explanation of how I see the mechanism in a post responding to Nick Pearce at the IPPR on this issue:
http://www.taxpayersalliance.com/economics/2012/05/spending-deliver-stronger-economic-growth.html

The only point I would add is that the variation between countries might not be good news for the UK. See page 172 of our report, evidence seems to be that infrastructure does less for growth in developed than developing economies. Presumably because they're building things like roads whereas we're wasting money on things like HS2.

Best,
Matt

Paolo Siciliani

"The fact that the Nordic countries have achieved good growth with high public spending does not create a case for other nations to raise public spending, if bad institutions cause that spending to go on boondoogles and bureaucrats rather than upon measures to raise outcomes."

The point is, though, what if bad institutions also affect the provision of "public" services by private operators? In that case the public would waste their money on (private) boondoogles and bureaucrats all the same, or renounce to pay for the service altogether, which might be worse for short-term or long-term growth.

I think your framework works when private spending is crowded-out, which as you argued in point 1 is not the case nowadays. Otherwise, you are simply claiming that private boondoogles are more palatable than public ones, whatever.

The key question than is, if there are bad institutions, what is the easiest way to improve on them, when "public" spending is in the hands of private lobbyists or public bureaucrats? And let's not come up with the story that market discipline will keep private providers honest, because this doesn't wash, not unless you put a strong regulatory regime in place, which kind of fudge the argument I would have thought. (By the way, this is not about macro stuff, but industrial organisation, micro and behavioural economics.)

Stephane Genilloud

It is impressive how good economics often sounds like a statement of the obvious.

And it is no less impressive that many economists and policymakers so often lack the common sense required for understanding such kind of economics.

fake

I would argue that the Nordic countries do have small governments, they are only large as a %.

Their governments are tiny compared to ours in pure numbers, the more numbers the bigger the risk of money being spent on boondoogles and bureaucrats.

Greg Hill

I'd add market structure to your list. A large part of the U.S. economy can be fairly characterized as monopolistic competition, where P > MC, and producers will happily produce more if there's more demand.

From a social point of view, resources in this sector are underemployed, and government spending, by increasing demand, via direct purchases and multiplier effects, will often, but not always, yield net benefits.

bill james

Good answers in return of this issue with solid arguments
and describing the whole thing regarding that.

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