This can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economy's output.
An NBER paper that analyzes a panel of OECD countries found that government spending also has a strong negative correlation with business investment.
Where the assumptions or data are uncertain, the analysis should fully explore the potential consequences of different assumptions or different potential values for the uncertain data.
Proponents of government spending claim that it provides public goods that markets generally do not, such as military defense, enforcement of contracts, and police services.
According to the multiplier theory, an initial burst of government spending trickles through the economy and is re-spent over and over again, thus growing the economy.
A multiplier of 1.0 implies that if government created a project that hired 100 people, it would put exactly 100 (100 x 1.0) people into the workforce.These views of spending assume that government knows exactly which goods and services are underutilized, which public goods will be value added, and where to redirect resources.However, there is no information source that allows the government to know where goods and services can be most productively employed.In a September 2009 National Bureau of Economic Research (NBER) paper, Harvard economists Robert Barro and Charles Redlick estimated that the multiplier from government defense spending reaches 1.0 at high levels of unemployment but is less than 1.0 at lower unemployment rates.Non-defense spending may have an even smaller multiplier effect.Barro and Ramey's multiplier figures, far lower than the Obama administration estimates, indicate that government spending may actually decrease economic growth, possibly due to inefficient use of money.Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens—either now or in the future—which leads to a reduction in private spending and investment.In response to the financial crisis and its impact on the economy, the federal government has increased government spending markedly in order to stimulate economic growth.With billions of taxpayer dollars appropriated toward this effort, policy makers should examine whether federal spending actually promotes economic growth.Rather than spend money where it is most needed, legislators instead allocate money to favored groups.Though this may yield a high political return for incumbents seeking reelection, this process does not favor economic growth. A 1974 paper by Stanford's Gavin Wright found that political attempts to maximize votes explained between 59 and 80 percent of the difference in per capita federal spending to the states during the Great Depression.