The Negative Correlation between Government Stimulus and Growth

    Margaret McGuire

    An analysis of the increase in government spending for OECD (Organization of Economic Cooperation and Development) countries reveals a surprising result.  Increased stimulus spending correlates to lower rates of real GDP growth. It should be noted that:

    • While the correlation is relatively strong (-0.71), it certainly does not indicate causality.
    • The data set is carefully defined as “Change in Government Spending as a % of GDP from 2007 to 2009” and “Change in real GDP Growth from 2006 / 7 to 2008 / 9.”  There could be ‘lag effects’ between stimulus spending and growth however, analysis using an increased period of time between spending and GDP growth reveals similar negative correlation.  (Market Edge will publish a time based study using several ‘lag intervals’ as OECD data is published.)
    • Countries with the highest rates of stimulus spending may have had disproportionately severe economic fundamentals.  Some economists and politicians have argued that stimulus spending was insufficient and should have been bigger however, the attached data set does not providing a supporting example.

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