Can Government Spending Get America Working Again? An Empirical Investigation

In this paper, we examine the effectiveness of government spending on private-sector job growth. Rather than contemplate the average or typical effect of government stimulus on private-sector jobs, we divide the past fifty years of U.S. economic history into low-growth and high-growth periods. We then apply a non-linear, two-regime model to study whether the stimulus effects of government and private investment differ between recessionary and expansionary periods. During periods of economic sluggishness, we find that government spending has zero effect on private-sector job creation. This result is consistent with the apparent impotence of huge federal government spending increases aimed at reducing unemployment. In contrast, when it comes to job growth, expansions in private investment are effective in both regimes, but its efficacy is greatest during economic stagnation. By implication, policies that discourage private investment may have severe job-killing effects during economic downturns, since it is during the low growth periods that private investment is most effective at creating jobs. In light of these results and the evident failure of government stimulus to restore economic growth, job creation appears best served, under present economic conditions, by policies that encourage efficient private-sector investment such as tax and regulatory relief