December 3rd, 2010 by Hafiz Noor Shams
Although normatively one should not judge a book by its cover, positively, first impression matters. The first few lessons in economics are likely to affect a person’s perspective on the roles of government. Those who are familiar with economics and who ended up skeptical with the concept of activist government have to suffer those first lessons that suggest increased government spending in the economy is good.
Introductory macroeconomics at the undergraduate level typically presents the Keynesian consensus quite forcefully. Students tend to spend considerable amount of time studying the mechanics of simple IS-LM. The simplified model, while useful as a primer and for the cultivation of understanding in the workings of the economy, tends to overemphasize the effectiveness of government spending in the economy. In the jargons of macroeconomics for example, increase (decrease) in government spending positively (negatively) shifts the IS curve to increase (decrease) aggregate demand that eventually increases (decreases) economy-wide output, given all else the same.
Other complications do get introduced to shake that ceteris paribus assumption by a bit like the crowding out effect of higher interest rate on other components of the GDP and the dynamic of monetary policy. Here, for the first time, macroeconomics cautions students that sometimes, the effect of change in government spending can be ambiguous.
Add more complications and only then, government spending can be bad. Unfortunately, by adding more and more complications, the pedagogic value becomes marginal, making it wise for teachers of introductory macroeconomics to stop at the level where the lesson of the semester suggests that government spending is largely favorable.
By the time simple complications such as monetary policy are introduced, the perception that government is almighty will already have been ingrained in students. Consider the Keynesian multiplier. Students will learn this concept early, well before greater realism appears in the picture. Specifically, it is the idea that an increase in government spending has amplifying impact on total output, never mind that the rate of the multiplier itself is controversial.
My biggest grip has always been the silence regarding government finance. Increased government spending has to be funded. This concern is only answered at the later stage of introductory course, where Ricardian equivalence is finally mentioned. When it is mentioned however, it sounds like a minor curiosity only.
Given the bias, it is a miracle how anybody could finish undergraduate economics and become skeptical of government spending being the panache to short-term economic fluctuation.