Saturday, January 15, 2011

More Investment (Not Government Spending) Is What Makes the Economy Tick

It should be obvious, but since governments don't pay heed, it's always a good idea to repeat it. According to John Taylor (my edits):
Some economists argue that efforts to reduce government spending as a share of GDP have adverse effects on unemployment. This is not what the data show. There is no indication that lower government purchases increase unemployment; in fact we see the opposite. In sharp contrast, the data on spending shares show that the most effective way to reduce unemployment is to raise investment as a share of GDP.
Not convinced? A picture (or two) is worth a thousand words (US data, 1990 to 2010):

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