Study: Models that forecast impact of government spending are easily manipulated

May 4, 2017 by Matt Shipman, North Carolina State University
Credit: George Hodan/public domain

Economists at North Carolina State University and Indiana University have found that the most widely used model for predicting how U.S. government spending affects gross domestic product (GDP) can be rigged using theoretical assumptions to control forecasts of how government spending will stimulate the economy.

By accounting for these assumptions, the researchers developed an impartial version of the model, which found that every dollar of increased government spending results in more than a dollar's worth of GDP growth.

"There is a longstanding debate over the impact of government spending, and people who are very smart disagree - one camp holds that a dollar of spending leads to more than a dollar in GDP growth, while the other camp holds that spending results in less than a dollar in GDP growth," says Nora Traum, an associate professor of economics at NC State and co-author of a paper describing the work. "This debate is important because it plays a role in determining government spending policies."

In an attempt to better understand the issues underlying the debate, the researchers evaluated the model used by economists - from central banks to the International Monetary Fund - to predict the impacts of government spending.

The researchers found that by making tweaks to specific assumptions in the model, they could effectively force the model to make predictions that supported one government spending camp or the other - even if they used the exact same data.

For example, the researchers found that assumptions related to how Congress and central banks will address the servicing of national debt could have a powerful effect on the predicted impact of spending.

Based on their observations, the researchers then developed an agnostic model, which was designed to avoid those tweaks that predispose the results to support a particular argument.

"We found that the agnostic predicts roughly $1.30 in near-term GDP growth for each $1 in spending," Traum says.

"This work looks at aggregate , but it raises some interesting questions about the impact of in specific areas, and on how these statistical assumptions may be influencing economic forecasts in other sectors," Traum says.

The paper, "Clearing Up The Fiscal Multiplier Morass," is published in the journal American Economic Review. The paper was co-authored by Eric Leeper and Todd Walker of Indiana University.

Explore further: ACA medicaid expansions didn't increase states' spending

More information: Clearing Up the Fiscal Multiplier Morass, American Economic Review (2017). www.aeaweb.org/articles?id=10. … aer.20111196&&from=f

Related Stories

New study shows how the US can avoid a debt disaster

October 31, 2016

A new study by John Merrifield, professor of economics at The University of Texas at San Antonio, describes a way for the United States to curb its spending and stop the growth of the astronomical national debt, which is ...

Recommended for you

Study sheds new light on ancient human-turkey relationship

January 17, 2018

For the first time, research has uncovered the origins of the earliest domestic turkeys in ancient Mexico. The study also suggests turkeys weren't only prized for their meat—with demand for the birds soaring with the Mayans ...

2 comments

Adjust slider to filter visible comments by rank

Display comments: newest first

ForFreeMinds
1 / 5 (1) May 04, 2017
No surprise here. This is why politicians pay economists to create such models, to give them the answers they want.

On the other hand, regarding the question as to whether or not government spending is good for the economy that is simple. Beyond spending to protect us from others who'd harm us, that government spending first harms us because it takes that money from us via force (so we're worse off because we have less money to spend on ourselves). Someone else is better off of course, including the people in government doing it. But then, that isn't government protecting us form people who'd harm us, it's government getting in bed with people to harm us.
howhot3
not rated yet May 04, 2017
Well, lets call a spade a spade. Your one of them @ForMindFuk... Obviously your of the idea that you want the rich to keep all of there money, and the poor should be enslaved. I think the first people that should be enslaved are the idiots like the above.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.