Do Government Spending and Tax Rebates Stimulate Growth?

December 18, 2008

President-elect Obama and other politicians are urging a massive expansion in government spending, ostensibly to help the economy recover. This Keynesian endeavor is supposed to boost growth by “priming the pump” by means of circulating extra money through the economy. Yet the notion that bigger government leads to more growth is theoretically suspect: any money that the government “injects” into the economy with new spending (or tax rebates) must first be borrowed and diverted from private use. The economic pie gets sliced differently, but it is not any bigger. The real-world evidence is similarly unfavorable to Keynesianism. Huge increases in government spending under both Hoover and Roosevelt did not help the economy during the 1930s, and more recent Keynesian initiatives—Gerald Ford’s rebates in the mid-1970s, Japan’s stimulus efforts in the 1990s, and President Bush’s rebates in 2001 and 2008—do not seem to have generated positive results. Please join Dan Mitchell of the Cato Institute and Steve Entin of the Institute for Research on the Economics of Taxation to review the theoretical arguments and empirical evidence regarding economic stimulus proposals.

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