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posted on 07 December 2016

The US Government Needs To Spend More

from Dirk Ehnts, Econoblog101

Sometimes it is interesting to look at the long run in order to see policy changes that somehow slip through under the radar. One of these instances, I think, is the way that real government consumption expenditures and gross investment have decreased since the Great Financial Crisis of 2008/09 (h/t to Nersisyan and Wray). Don’t get me wrong: there is lots of talk about upgrading infrastructure, sure.

However, most people seem to believe that this is the result of a neglect for public infrastructure over some decades. While I think that this is right, probably most people would not have thought that this problem got a lot worse since 2010:

us-govspendtax

The expenditures of government stopped following the upward trend after the recession, whereas transfers and taxes resumed the historical upward-sloping path. Only in the last few years did government expenditures grow again, but just slightly, not surpassing the historical maximum from 2009. This means that government could do and probably should do more in order to get the economy out of a situation of low growth and low participation in labor markets. The Civilian employment to population ratio has still not recovered and seems to stagnate now (data).

So, if there are people who would like to rejoin the labor market, why not return to normal and lift US government spending up to where it was before the crisis? That surely would create unemployment and since the US government cannot go broke anyway it would not do any harm to future generations either.

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