Government Purchases, Government Transfers, and the Post‐1970 Slowdown In U.S. Economic Growth

In: Contemporary economic policy: a journal of Western Economic Association International, Volume 18, Issue 1, p. 107-123

Abstract

This article shows that the post‐1970 slowdown in U.S. economic growth can be explained by a shift in fiscal policy away from government purchases and toward transfer payments. Two endogenous growth models that include government purchases and transfers imply a relationship between these variables and long‐run growth. Empirically, the simultaneous decline in the fraction of output purchased by federal, state, and local governments and rise in transfer payments around 1970 dramatically overpredict the growth slowdown of the early 1970s. The growth rate is predicted to have risen in the absence of this change in fiscal policy.