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Does Stimulus Spending Work?

After the housing bubble burst, both the Bush and Obama administrations turned to stimulus spending in an effort to improve U.S. economic growth. Stimulus spending is often justified by the thought that it is the government’s responsibility to create jobs. Proponents of the policy claim that an injection of government dollars will create jobs for people who will spend their new income and, in effect, create more jobs. Critics claim that because government money does not just fall from the sky, stimulus spending really just moves jobs from one place to another without creating actual economic growth.

What does the evidence say? Does stimulus spending work? Professor Antony Davies examines data on increases in federal spending and economic growth one year later. When this data is plotted on a graph, it is clear that there is no connection between federal spending and economic improvement. Instead, Professor Davies argues, the only thing stimulus spending does is make the budget deficit worse.

In the past three years, the Federal Reserve and federal government have injected the equivalent of two Canadian economies into the U.S. economy. Despite this stimulus, the unemployment rate remains 9 percent. “One thing that has changed,” says Davies, “is that our government is now $4.6 trillion further in debt than it was before the stimulus efforts.”



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