Saturday, August 20, 2016

St. Louis Fed on government spending and jobs: well there's your problem


I'm sorry, this just looks bad:

St. Louis Fed - does government spending create jobs? Quote:
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of "natural experiment" for our analysis.

Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call "an endogeneity bias."

Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation's business cycle.

And no surprise at what they find:

We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.

Yeah, don't you see the problem?

You've factored out all government spending associated with economic activity. But Y correlates with L.

So that means you've factored out any government spending that correlates with jobs.

So it wouldn't surprise me that you've found that the government spending that's not correlated with jobs is not correlated with jobs.

I also think it's faulty methodology to use 120 years of military spending, because those periods will include:

1) American pre-war and intra-war isolationism;
2) WWII's command economy, with its wage and price controls; and
3) the wasteful spending of post-WWII's military-industrial complex.

That is one big fallacy of analogy there.

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