The Power of the Purse
The House of Representatives is invested with the “power of the purse,” the ability to tax and spend public money for the national government.
What the above misses is the degree of control over “We the People” that The Power of the Purse gives to the government. At least two revolutions were about money, USA’s Tea Party, and France’s Bastille Day, the storming of the Bastille prison over excessive taxes. Don’t get hung up over magic numbers, consider the revolutionary power it might once again beget.
Yes it is. And, as you note, different spending has different economic impact.
What Arnott calculated and plotted is the relationship between economic growth and 5yr average government spending (as a percent of GDP) over the last 40 years for 22 countries. What he found was
Growth = 5.1% - (0.075 x spending)
He did not look at the hundreds of inputs and outputs found in econometric models.
Over the 40 years about half the countries increased spending as a percentage and half decreased. Here the relationship was
That might be relevant in the years after the war, but the US had become that manufacturing powerhouse in 1943, 1944, and 1945 when there were no foreign markets to sell to, and no foreign producers to import from.
The simple fact is that massive government spending put the country to work, and we produced aircraft by the thousands, tanks by the tens of thousands, more ships than ever before, and millions upon millions of rifles, pistols, artillery, and munitions - all without the benefit of “paying customers.”
We could have done the same thing to become “a manufacturing powerhouse” and then taken all the products out to the middle of the ocean and sunk them with the same effect, in, say, 1936.
Hoover was far too timid in fighting the Depression, and increased government spending a little - and got tremendous blowback for it. FDR increased was Hoover did 10-fold (or more, dunno) and got even worse blowback. World War II increased Roosevelt’s spending another 10-fold *(?) and suddenly we were a “manufacturing powerhouse” and everyone’s including fiscal scolds, stood around congratulating ourselves for our thriving capability.
Sure, we dominated AFTER the war because everyone else was bombed out, but we created that powerhouse DURING the war without customers domestic OR abroad, simply by massively using government funds to employ the nation.
I’d agree that a sudden pop in government spending can, and does, stimulate the economy greatly. Look at the chart, you can clearly see the WWII pop in spending. You can also clearly see that after WWII, spending returned to “normal” to the low 20-something percent of GDP. But I’d argue that raising spending and then keeping it raised for an extended period of time will have diminishing returns as far as economic growth is concerned.We’ve climbed to 35+%, and more recently 40+%, and it’s lasted for something like 15 years since the GFC. I suspect we’ve hit diminishing returns already.
Exactly, his research and the now-famous Rahn Curve have been cited as being overly simplistic.
Apart from the different kinds of spending, not all government spending looks the same. Some is at the local level, some at the state level, and then there’s federal spending. By lumping all countries together in a study, without looking at differences, you have to put in disclaimers like…
“Of course, correlation, no matter how strong, does not imply causation.”
As in all things, “it depends.” If the sudden pop is just money in people’s bank accounts, yes there is a burst of economic activity but once it’s spent (and 2nd and 3rd order spending slows down) you are back where you started. The “pop” is temporary, even if that means “a couple years.”
I would argue that the burst of government spending during World War II was not that, it rebuilt the economic infrastructure of the United States. Factories were refitted. Scientists were hired for nuclear - and more mundane enterprises like metallurgy, conventional explosives, radar, avionics, etc. Roads were improved, railroads were built or rebuilt, shipyards were retrofitted, and so on.
Almost none of this was “consumer”, but it prepared the US for the post-war economy in a way that few would have thought possible, especially those railing against such government enterprises as the TVA, Grand Coulee Dam, and electrification of the country.
(Try to imagine FDR proposing the scale of such infrastructure improvements by issuing debt, as he attempted to do in the 1930’s on a far more limited basis.)
Yes, it depends where the money goes.
On the other side, the “magic percentage” is just silly. A dollar spent on health care is the same GDP dollar whether it comes from a socialized medicine scheme run by government or from private employers and private insurance and the convoluted prescription pricing and doctor payments we “enjoy” today. That percentage would swing wildly depending on which pocket it came from, but GDP would remain exactly the same. The “magic percent” obviously, would be vastly different.
