Article • Dean Baker’s Beat the Press
Fact-based, data-driven research and analysis to advance democratic debate on vital issues shaping people’s lives.
Center for Economic and Policy Research
1611 Connecticut Ave. NW
Suite 400
Washington, DC 20009
Tel: 202-293-5380
Fax: 202-588-1356
https://cepr.net
The folks who thought the housing bubble was cool are now working overtime to make the victims of its collapse suffer as much as possible. This presumably explains the reason that Washington Post columnist Michael Gerson claimed that a Goldman Sachs study of 44 countries found that a study of 44 countries found that: “reducing government expenditures by one percentage point, in contrast, increases average annual growth by 0.6 percentage points.”
What the study actually found was that a one percentage point decline in government consumption expenditures was associated with a 0.63 percent increase in growth. However, it found that a one percentage point increase in government investment expenditures (spending on education, research, infrastructure etc. ) was associated with a 1.25 percentage point increase in growth. This would mean, for example, that a one percentage point decline in spending that was split evenly between cuts to government consumption and cuts to investment would lead to 0.31 percentage point decline in GDP growth.
There are reasons that this study is inapplicable to current circumstances. Most notably, the bulk of the benefit from spending cuts appears to come through the channel of lower interest rates inducing more investment. This is unlikely to be a important channel given that interest rates are already extremely low, however, even ignoring this issue, Gerson has seriously misrepresented the findings of the study that he cited.