Government Spending and Private Activity

This chapter examines the effect of government spending on private spending, unemployment, and employment, and shows that an increase in government spending never leads to a significant rise in private spending. In fact, in most cases, it leads to a significant fall. These results imply that the government spending multiplier is more likely below one rather than above one. The chapter also shows that all of the increase in employment after a positive shock to government spending is due to an increase in government employment, not private employment. These results suggest that the employment effects of government spending work through the direct hiring of workers, not stimulating the private sector to hire more workers. A commentary is also included at the end of the chapter.