Increased Government Spending Depresses The Economy (Chart)

Arthur Laffer has a great article in the Wall Street Journal, talking about the relationship between government spending and the GDP.

As he points out, the GDP factors government spending into the equation, so every one dollar of government spending should cause the GDP to rise a dollar. One would think then, that if government blows through $4 trillion to stimulate the economy, the GDP would rise by $4 trillion. Indeed, Keynesian economic theory holds that for every government dollar spent, there should be two or three dollars of economic growth. However, this is not at all what happens in the real world, as the following chart demonstrates:

government spending as a depressant While the relationship is imperfect, clearly the decline in the growth of GDP bears an inverse relation to the money spent to stimulate the economy. Thus, Estonia increased government spending by 12.8%, and saw a 35.5% decline in the growth of GDP, while Australia increased government spending by 3.3% and only saw a 3.5% decline in the growth of GDP as a result of the financial crisis.

To Laffer, the lesson is clear:

The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That’s an expensive leap of faith with no evidence to confirm it.

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