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Rethinking the Relation between Government Spending and Economic Growth: A Composition Approach to Fiscal Policy Instruction for Principles Students

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Author Info
Arthur H. Goldsmith () (Washington and Lee University)
Abstract

Standard introductory textbook authors assert that an increase in government spending expands aggregate demand in the short run but also raises the interest rate and, thus, crowds out private investment in the long run. Because the decrease in investment results in a smaller capital stock, potential output or production capacity decreases. The author challenges the standard assertion by dividing government spending into two components: public consumption and public investment. The short-run effects of an increase in government spending are the same for both components but the long-run effects are dramatically different. The author demonstrates the importance of the composition of public spending to long-run economic performance, using the conventional graphs found in the leading principles of economics textbooks.

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Publisher Info
Article provided by Helen Dwight Reid Foundation in its journal The Journal of Economic Education.

Volume (Year): 39 (2008)
Issue (Month): 2 ()
Pages: 153-173
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Handle: RePEc:jee:journl:v:39:y:2008:i:2:p:153-173

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Related research
Keywords: fiscal policy; potential output; principles textbooks; private capital; public capital;

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Find related papers by JEL classification:
A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures

References listed on IDEAS
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  1. Lynde, Catherine & Richmond, James, 1992. "The Role of Public Capital in Production," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 37-44, February. [Downloadable!] (restricted)
  2. Satya Paul & Balbir S. Sahni & Bagala P. Biswal, 2004. "Public Infrastructure and the Productive Performance of Canadian Manufacturing Industries," Southern Economic Journal, Southern Economic Association, vol. 70(4), pages 998-1011, April.
  3. Nadiri, M Ishaq & Mamuneas, Theofanis P, 1994. "The Effects of Public Infrastructure and R&D Capital on the Cost Structure and Performance of U.S. Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 22-37, February. [Downloadable!] (restricted)
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  4. Demetriades, Panicos O & Mamuneas, Theofanis P, 2000. "Intertemporal Output and Employment Effects of Public Infrastructure Capital: Evidence from 12 OECD Economics," Economic Journal, Royal Economic Society, vol. 110(465), pages 687-712, July. [Downloadable!] (restricted)
  5. Randall W. Eberts & Michael S. Fogerty, 1987. "Estimating the relationship between local, public and private investment," Working Paper 8703, Federal Reserve Bank of Cleveland. [Downloadable!]
  6. Shah, Anwar, 1992. "Dynamics of Public Infrastructure, Industrial Productivity and Profitability," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 28-36, February. [Downloadable!] (restricted)
  7. Dalamagas, Basil, 1995. "A Reconsideration of the Public Sector's Contribution to Growth," Empirical Economics, Springer, vol. 20(3), pages 385-414.
  8. Gramlich, Edward M, 1989. "Budget Deficits and National Saving: Are Politicians Exogenous?," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 23-35, Spring. [Downloadable!] (restricted)
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