What should you expect when most government economists seem to follow Keynes, know for saying, amongst other things, that "In a depression governments should pay people to dig holes and then fill them up again"?
Even disciples of Keynes, such as Harvard's Greg Mankiw, recently highlighted economic studies that show government spending binges -- shocks, they are sometimes called -- don't seem to help the economy grow. They might even make it worse.
One of the studies cited by Mr. Mankiw was by two European economists (Andrew Mountford and Harald Uhlig), titled "What are the Effects of Fiscal Shocks?" It looked at big, deficit-financed spending increases and found that they stimulate the economy for the first year, but "only weakly" compared with a deficit-financed tax cut. The overriding problem is that the deficits crowd out private investment and, over the long run, may make the economy worse. "The resulting higher debt burdens may have long-term consequences which are far worse than the short-term increase in GDP."
Two other studies point in the same direction. A paper by two economists, including the current chief economist at the International Monetary Fund, Olivier Blanchard, concluded that increased taxes and "increases in government spending have a strong negative effect on private investment spending."
Roberto Perotti, an Italian economist with links to Columbia University, in "Estimating the Effects of Fiscal Policy in OECD Countries," found nothing but bad news for Keynesians. Economic growth is little changed after big increases in government spending, but there are signs of weakening private investment.
Source: Financial Post