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InsiderOnline Blog: May 2012

Cutting Government Spending Hasn’t Led to the Doom Predicted by Keynesians

“The green regression line highlights the most important takeaway from this chart: that there is no obvious relationship between a decrease in government spending and a decrease in GDP. Keynesians would expect the line to slope upward; in fact, it slopes slightly downward. But the slope of the line is not significantly different from zero […] .

“The chart has two policy implications. First, austerity has not caused even near-term harm to countries that have undertaken it. Second, austerity is something of a free lunch. This is because, as studies (such as a 2010 paper by economists Andreas Bergh and Martin Karlsson) show, longer-run growth is higher in countries with smaller governments. Nations that reduce spending today can do so without fearing that the longer-run growth is being purchased with a costly near-term recession.” [Kevin A. Hassett, American Enterprise Institute, May 25]

Posted on 05/29/12 11:15 AM by Alex Adrianson

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