In a new National Bureau of Economic Research (NBER) study, UC-San Diego professor Valerie A. Ramey found that 1) private spending falls significantly in response to an increase in government spending, and 2) increases in government spending lower unemployment through an increase in government employment, not private employment.
She concluded,
For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. These results imply that the government spending multiplier is below unity [one]. Adjusting the implied multiplier for increases in tax rates has only a small effect. The results imply a multiplier on total GDP of around 0.5. (pp. 20-21)
In other words, there is no such thing as government “stimulus” of the private sector. Rather, government spending does more harm than good to the private sector economy.
