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Why Government Spending Stimulus Often Fails to Stimulate

2010 March 30
by Phil Miller

Niels Veldhuis and Charles Lammam, responding to political criticism on a study they wrote on Canadian government stimulus attempts, have written an useful piece on why many economists think government spending tends to have a multiplier that is less than one (via fellow TSE blogger John Palmer).

In another 2009 study published in the prestigious American Economic Review, Stanford University professor John Taylor reviewed the evidence over the past decade on fiscal stimulus and concluded “there is little reliable empirical evidence that government spending is a way to end a recession or accelerate a recovery.”

A 2008 study, “What are the Effects of Fiscal Policy Shocks?” by University of London professor Andrew Mountford and University of Chicago professor Harald Uhlig, assessed and compared the economic impact of various cases of deficit-financed spending, deficit-financed tax cuts and tax-financed spending from 1955 to 2000. They found that spending related measures are the weakest ways to stimulate the economy and that both deficit-financed and tax-financed spending have the effect of discouraging private investment.

The International Monetary Fund (IMF), which Prime Minister Harper has cited as an authority, recently surveyed fiscal stimulus initiatives in advanced and emerging economies and concluded that the average effect of discretionary fiscal policy “does not provide strong evidence of countercyclical effects.” Simply put, the IMF concluded that fiscal stimulus is generally not an effective way to combat recessions.

Aside from the obvious macroeconomic angle, what’s the sports angle here? The article helps explain why sports economists consistently find that stadium construction subsidies fail to generate much, if any, “economic impact” in local markets in terms of metro-area wide employment and income. First, stadium construction tends to crowd out other forms of construction since construction resources can’t be working on two separate projects at exactly the same time, indirect evidence for which I found in my 2002 Journal of Urban Affairs article on construction industry employment and wages. Second, spending at sports events that comes from locals crowds out spending on other activities such as dining out and attending movies. Third, sports subsidies are financed with debt instruments and/or taxes. The debt crowds out other types of investment spending while taxes discourage economic activity.

If there’s a consensus among sports economists, it’s that sports subsidies are poor uses of taxpayer money*.

*Update: Rod Fort correctly notes in the comments that there are externalities associated with sports, both positive and negative, that are being addressed by sports economists and should be included in any cost-benefit analysis. I should have been more explicit in that last sentence and said that sports subsidies are poor uses of taxpayer money to increase employment and income.

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