Wednesday, July 18, 2012

More Government Spending, Fewer Jobs

That is the conclusion by Michael Cox and Richard Alm in their essay, "Sorry, Keynes Was Wrong, More Spending Doesn't Boost Jobs" that appeared in Investors Business Daily. Their piece is mainly a discussion of the data pictured in this graph:

This is in accord with with a broad empirical study by James Gwartney, Randall Holcombe, and Robert Lawson, "The Scope of Government and the Wealth of Nations," The authors use data from several OECD countries and find that total government spending as a percentage of GDP was negatively related to GDP growth.

It stands to economic reason that government spending is negatively related to employment. Demand for labor is positively related to labor productivity which is the result of capital accumulation. Government spending causes capital consumption which reduces labor productivity and labor demand. Fewer people will be employed and the economy will be less productive.

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