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These views of spending assume that government knows exactly which goods and services are underutilized, which public goods will be value added, and where to redirect resources.However, there is no information source that allows the government to know where goods and services can be most productively employed.
This effect is known as "crowding out." In addition to crowding out private spending, government outlays may also crowd out interest-sensitive investment.
Government spending reduces savings in the economy, thus increasing interest rates.
Barro and Ramey's multiplier figures, far lower than the Obama administration estimates, indicate that government spending may actually decrease economic growth, possibly due to inefficient use of money.
Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens—either now or in the future—which leads to a reduction in private spending and investment.
Where the assumptions or data are uncertain, the analysis should fully explore the potential consequences of different assumptions or different potential values for the uncertain data.
Proponents of government spending claim that it provides public goods that markets generally do not, such as military defense, enforcement of contracts, and police services.Conversely, when governments cut spending, there is a surge in private investment.Robert Barro discusses some of the major papers on this topic that find a negative correlation between government spending and GDP growth.Standard economic theory holds that individuals have little incentive to provide these types of goods because others tend to use them without paying.John Maynard Keynes, one of the most significant economists of the 20th century, advocated government spending, even if government has to run a deficit to conduct such spending.This can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economy's output.An NBER paper that analyzes a panel of OECD countries found that government spending also has a strong negative correlation with business investment.Rather than spend money where it is most needed, legislators instead allocate money to favored groups.Though this may yield a high political return for incumbents seeking reelection, this process does not favor economic growth. A 1974 paper by Stanford's Gavin Wright found that political attempts to maximize votes explained between 59 and 80 percent of the difference in per capita federal spending to the states during the Great Depression.Although the studies are not all consistent, historical evidence suggests an undesirable, long-run effect from government spending: it crowds out private-sector spending and uses money in unproductive ways.Policy makers should use the best literature available to analyze government spending designed to spur growth for the likelihood of achieving that effect.