Tony and I have an op-ed at Real Clear Policy about the economic impact of government spending. Here’s an excerpt.
During the Great Depression, Keynes argued that even digging and refilling holes would be beneficial. Accordingly, the federal government’s Works Progress Administration sometimes employed people in low-value activities such as picking up roadside litter. During the most recent economic crisis, Nobel Laureate Paul Krugman advocated spending by the government for any reason, including even an imaginary one such as a space alien hoax requiring “a massive buildup to counter the space alien threat.”
Our research comes to a different conclusion: Even in a depressed economy, the benefits of fiscal stimulus are not sufficient to justify indiscriminate spending.
Specifically, we account for the fact that government spending requires taxation, which lowers national income by reducing the incentive for people to work. Furthermore, even new jobs for previously unemployed workers require foregoing the value of alternative activities, such as working at home or in the underground economy.
After subtracting these costs, we find that stimulus spending is economically justifiable only if what it produces, such as infrastructure improvements, provides the public with at least 70 cents on the dollar in value. While this result allows for a relatively small amount of waste (no more than 30 cents per dollar, and only in a depressed economy), it clearly rules out make-work schemes such as those described by Keynes and Krugman.
Read the whole thing here.
Our full research paper is available here.