Government Spending on Low Value Projects Increases Current U.S. 'Policy Value Gap'

Abstract:     
Despite a historically unparalleled increase in federal spending since the 2008 financial crisis, the U.S. economy remains subdued, as evidenced by the 1.5% growth rate in the second quarter and dismal employment figures. Continued weakness will undoubtedly have a deleterious impact on the U.S.’ credit profile, which will exacerbate the concerns regarding the government’s ability to service the debt along-side its social commitments. This piece argues that an analytical framework based on standard financial concepts, such as return-on-investment and opportunity cost, provides a superior understanding of the true impact that government fiscal policies have on economic growth. Such a framework clearly illustrates that the stimulus policies enacted since 2008 are playing a role in suppressing economic growth and more importantly, the expectations for future growth, by mis-allocating society’s resources. The authors also introduce the concept of a “Policy Value Gap,” which is the cost to society (defined as the deviation between the trend economic growth rate and the actual lower rate) from misguided government policies, which include fiscal policies.

Number of Pages in PDF File: 7

Keywords: macro, economics, tax, fiscal, policy, deficit, policy value gap

working papers series