Reference no: EM131756803

Does Government Spending Create Jobs?

The Golden Gate Bridge is an international symbol of San Francisco. The bridge spans the entrance to San Francisco Bay from the Pacific Ocean. Construction of the bridge began in 1933, and the bridge was open to traffic in 1937. Doyle Drive is a 1.6-mile stretch of U.S. Highway 101 and the main approach to the bridge from the San Francisco side. Doyle Drive was in desperate need of reconstruction, but for many years the city of San Francisco and the state of California had failed to provide the funding. In early 2009, President Barack Obama and Congress enacted the American Recovery and Reinvestment Act (ARRA, often referred to as the "stimulus bill") in an attempt to increase aggregate demand during the recession of 2007-2009. The ARRA is an example of discretionary fiscal policy aimed at increasing real GDP and employment. Some of the funds from the act were allocated to the Doyle Drive project. San Francisco Mayor Gavin Newsom welcomed the news: "This project is shovel ready and a signature example of how the federal stimulus can close the funding gap, stimulate the economy, improve transportation, and create jobs in San Francisco."

The Doyle Drive project was designed by the Flatiron Corporation, and construction was carried out by Kiewit Construction, headquartered in Omaha, Nebraska. Kiewit hired hundreds of workers for the project, which was completed in July 2015. The project to rebuild Doyle Drive is an example of increased government spending resulting in increased employment. Or is it? A majority of economists agree that a temporary increase in government spending can lead to increased employment during a recession. But some economists argue that fiscal policy actions like ARRA shift employment from one group of workers to another but do not increase total employment. The argument over the effect of government spending on employment continued years after the end of the recession of 2007-2009.

When the federal government spends more than it collects in taxes, the result is a federal budget deficit. Following the recession, the federal government ran the largest peacetime deficits in history. During 2011 and 2012, Congress and President Obama enacted cuts in federal spending, increases in taxes, and limits on future spending increases to try to reduce the budget deficit. In 2015, Congress and the president somewhat loosened the limits on federal spending while continuing to debate whether additional spending was necessary to help the economy finally make it back to potential GDP.

• Explain the effect discretionary spending policy has on the aggregate economy.
• Expenditures such as the ARRA often increase the nation's debt (deficit). Can these expenditures ever be justified? Under what circumstances?
• Evaluate this comment: "This project is shovel ready and a signature example of how the federal stimulus can close the funding gap, stimulate the economy, improve transportation, and create jobs in San Francisco." Explain your perspective. Do you agree or disagree? Why or why not?
• The project to rebuild Doyle Drive is an example of increased government spending resulting in increased employment; or is it? A majority of economists agree that a temporary increase in government spending can lead to increased employment during a recession. However, some economists argue that fiscal policy actions like ARRA shift employment from one group of workers to another but do not increase total employment.
• Why might economists disagree?