Crowding Out

You’d think that your state’s senator’s getting a plum committee chairmanship would result in economic benefits for your state, wouldn’t you. But you might be wrong. Yes, the money comes in. But it doesn’t have the effect you might expect:

Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

In my view that constitutes additional empirical evidence for a Keynesian multiplier of less than one. I’m still waiting for empirical evidence from supporters of fiscal stimulus via deficit spending that measures outputs rather than measuring inputs.

Hat tip: Tyler Cowen

5 comments… add one
  • steve Link

    I could not find the original study. Did they look only at existing firms? Were there new firms created? How did the economy of those states perform? Did their GDP go up or down? What happened with overall employment? What was the overall level of increase in federal monies coming to the state, not just earmarks? (Earmarks sometimes just allocate money that a given state was going to receive anyway.) What happened to overall state revenues?

    Potentially a very important study, assuming it is confirmed and questions are answered.

    Steve

  • steve Link

    This by Thoma has a brief discussion of multipliers. He notes that no one is really sure about what they are when we approach zero interest rates. Sounds like we are in no-man’s land when it comes to models.

    Steve

  • steve Link
  • That’s an argument I haven’t heard before. The argument you generally hear is that empirical evidence is worthless, period.

Leave a Comment