Industry-Level Effects of Government Spending

22 February 2010 at 1:26 pm 1 comment

| Peter Klein |

A consistent theme of this blog’s postings on the financial crisis and recession is that the Keynesians focus on too high a level of aggregation. As economists and management scholars we care primarily about industries, firms, and individuals, not abstract macroeconomic aggregates like GDP, the “price level,” etc. Heterogeneity matters, and the way stimulus programs affect the allocation of resources across firms and industries is as important, or more important, than their economy-wide effects.

A new NBER paper by Christopher Nekarda and Valerie Ramey uses disaggregated industry-level data to examine the effect of the current US stimulus program on output, employment, real wages, and productivity. They find, not surprisingly, that increases in government spending directed toward a specific industry raise that industry’s short-term output and employment but — contrary to New Keynesian predictions — reduce that industry’s real wages and productivity.

Nekarda and Ramey note that stimulus spending has been directed disproportionately to durable-goods manufacturing and that these industries have higher returns to scale than other industries, possibly explaining how reductions in industry-level productivity could look like productivity gains in the aggregate. In other words, stimulus spending reduces efficiency in all industries, but directs resources toward industries that were more efficient to begin with, giving the appearance of a positive aggregate effect. Thoughtful and provocative.

Entry filed under: - Klein -, Bailout / Financial Crisis, Myths and Realities, Recommended Reading. Tags: .

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1 Comment Add your own

  • 1. Rafe Champion  |  23 February 2010 at 5:28 am

    On the topic of aggregation, consider the damage done by way of the support provided to Keynesians and other collectivists by the industry of national statistics that took off in the 1930s. The name Colin Clark comes to mind. http://en.wikipedia.org/wiki/Colin_Clark

    Collecting data is a very expensive business and if you can use data that the state conveniently collated for you, then you are well ahead. But it is a bit like looking for your keys under the street light and not in the dark where you dropped them.

    On the topic of productivity, it became apparent in the Australian debate on deregulation in the 1980s that the concept of productivity and it importance was novel for a lot of people, possibly well trained in Keynesian economics. Others who missed the point were the trade unionists.

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