Advancing a Free Society

Higher Investment Best Way to Reduce Unemployment, Recent Experience Shows

Friday, January 14, 2011

Some economists argue that the efforts now underway to reduce government spending as a share of GDP will have adverse effects on unemployment. This is not what the data show. Consider this chart which shows the pattern of government purchases as a share of GDP and the unemployment rate over the past two decades. (The data are quarterly seasonally adjusted from 1990Q1 to 2010Q3.) There is no indication that lower government purchases increase unemployment; in fact we see the opposite, and a time-series regression analysis to detect timing shows that the correlation is not due to any reverse causation from high unemployment to more government purchases.

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.

Continue reading John Taylor at Economics One...