Benjamin Tengelsen and Dr. Richard Evans, Department of Economics
Government transfers to households take many forms, including unemployment benefits, food stamps, social security, and cash handouts to households to stimulate consumption. Generally, these transfer programs act as “automatic stabilizers” due to the way they naturally increase (decrease) when economies are weak (strong). Often policy-makers suggest increasing these programs beyond their natural expansion during economic down-turns to bolster consumption. For example, Australia spent around 80% of its stimulus funds in the form of government checks to eligible citizens (Kennedy, 2009). Borrowing the methodology of Alesina and Ardagna(2009), we show that although many assume a positive correlation between government transfers and growth, empirically this is not so. Using OECD data for 30 developed countries from 1970 to present, we find a strong negative correlation between an increase in government transfers and growth in the following years.
The rationale behind government transfers to households is based on the premise that poorer households will consume larger portions of the government resources given to them relative to wealthier households. Thus by moving resources from wealthier households via current and future taxes to poorer households will increase consumption. This additional consumption helps keep businesses afloat during economically challenging times. Transfers are also attractive for
their political maneuverability, speed of implementation, and ability to target specific demographics. Our research objective was to see if this expansionary effect of government transfer programs was detectable empirically.
Our methodology was largely borrowed from a particular study by Alesina and Ardagna (2009). Their study examines the expansionary/contractionary effect of different fiscal stimuli (i.e. cutting taxes or increasing spending). They isolate their attention to episodes where taxes and/or spending changed dramatically over a short period of time, and monitor the trends of the overall economy following these large changes. We use the same techniques to isolate large changes in
transfer spending for a panel of OECD countries over several decades, and similarly monitor the trends of GDP and consumption in the periods following the fiscal shocks. Our statistical model controlled for simultaneous fiscal policies, historical growth trends within each country and in larger neighboring countries. We also controlled for fixed characteristics of the country such as population, and focused on a narrow enough cohort of countries such that the extent to which the country is “developed” is a non-issue. To our surprise, our findings were that large changes in
transfer spending generally preceded economic downturns rather than recoveries. We estimate that for a percent increase in transfer spending, the economy will contract by 1 to 2 percent in the 2 quarters following.
I presented my findings at the 2012 National Conference for Undergraduate Research (NCUR) in Ogden, UT. The conference featured students from a wide variety of disciplines, and participating forced me to learn how to communicate my research to a broader audience. Having an event like NCUR also forced me to acquaint myself with a broader range of economic research. Our study is closely related to economic studies on the effectiveness of government spending on the economy, fiscal multipliers, growth, development, and political economics. In
anticipating questions relating to these various sub-fields, I learned a lot more than what was presented in the slides. I also learned a great deal about what makes a presentation professional and effective. My mentor Richard Evans was generous with his time and guidance in teaching me how to present well.
I found the entire research process to be an incredible learning experience. From formulating the question, to collecting and cleaning data, to thinking about what variables to include in the model and to preparing my NCUR presentation, I gained valuable advice from my mentor relating both to the specific project and also to research in general. I currently enrolled in an Economics PhD program at Carnegie Mellon University and have found that my experience with mentored
research at BYU thoroughly prepared me for the rigors of a PhD education. Unlike many of my first-year peers who have little or no experience with actual research, I undertook this and other projects from start to finish while still an undergraduate student.
References
- Alesina A. and Ardagna S. (2009) Large changes in fiscal policy: taxes versus spending. National Bureau of Economic Research. NBER Working Paper No. 15438. http://www.nber.org/papers/w15438
- Kennedy S. 2009. Australia’s response to the global financial crisis – A speech to the Australia Israel Leadership Forum. Australian Treasury. Accessed 29 Oct at: http://www.treasury.gov.au/documents/1576/PDF/Australia_Israel_Leadership_Forum_by_Steven_Kennedy.pdf