Public Investment: Another (Different) Look

Using a structural Vector Autoregression approach, this paper compares the
macroeconomic effects of the three main government spending tools: government
investment, consumption, and transfers to households, both in terms of the size
and the speed of their effects on GDP and its components. Contrary to a common
opinion, there is no evidence that government investment shocks are more
effective than government consumption shocks in boosting GDP: this is true both
in the short and, perhaps more surprisingly, in the long run. In fact, government
investment appears to crowd out private investment, especially in dwelling and in
machinery and equipment. There is no evidence that government investment pays
for itself in the long run, as proponents of the Golden Rule implicitly or explicitly
argue. The positive effects of government consumption itself are rather limited,
and defense purchases have even smaller (or negative) effects on GDP and private
investment. There is also no evidence that government transfers are more effective
than government consumption in stimulating demand.