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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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  • Arthur H. Goldsmith

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.

Suggested Citation

  • Arthur H. Goldsmith, 2008. "Rethinking the Relation between Government Spending and Economic Growth: A Composition Approach to Fiscal Policy Instruction for Principles Students," The Journal of Economic Education, Taylor & Francis Journals, vol. 39(2), pages 153-173, April.
    • Handle: RePEc:taf:jeduce:v:39:y:2008:i:2:p:153-173
    DOI: 10.3200/JECE.39.2.153-173
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    Cited by:

    1. Ajit Karnik & Mala Lalvani, 2009. "Heterogeneity in Growth Processes: Estimating Growth Regressions using Panel Data," International Economic Journal, Taylor & Francis Journals, vol. 23(4), pages 561-590.
    2. Ajit Karnik & Mala Lalvani, 2012. "Growth performance of Indian states," Empirical Economics, Springer, vol. 42(1), pages 235-259, February.
    3. Gumede, Vusi & Bila, Santos, 2022. "Applying the National Income Identity Approach in Examining Determinants of Economic Growth in South Africa," African Journal of Economic Review, African Journal of Economic Review, vol. 10(2), April.

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