Dince the financial crisis of 2008, the budgetary tool has become a preferred economic stabilization tool. However, the current level of public debt, in a context of rising interest rates, has reduced the government’s room for maneuver, keen to provide guarantees of budgetary seriousness.
But the current debate on fiscal restraint does not take into account the degree of effectiveness of fiscal stimulus policies. If an increase in public spending causes a sufficiently high increase in real gross domestic product (GDP) (e.g. public orders to the private sector), public spending can theoretically be self-financing.
Traditionally, the macroeconomic effectiveness of budgetary policy is assessed by measuring the public expenditure multiplier defined as the GDP growth rate generated by an increase in public expenditure of one percentage point of GDP.
“Learning by necessity”
While the magnitude of the multiplier effect was until recently based on the increase in household consumption and the increase in their labor supply (due to the anticipation of higher taxes in the future), a A third channel has recently been highlighted: that of business productivity gains.
The economist Ethan Ilzetzki (London School of Economics) highlighted this by studying the effect of public spending on arms companies in the United States during the Second World War (“Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth”, Discussion Paper No. 17803, Center for Economic Policy Research, CEPR, January 2023).
Using archival data, the author shows that increased government orders for military equipment translated into large productivity gains in the use of both labor and machines. Overheated firms have no choice but to increase production for fixed amounts of labor hours and physical capital, even taking into account the greater intensity in the use of capital and work.
More specifically, the increase in labor productivity that is not attributable to increased capital intensity or increased use of existing labor and capital rises on average by 0.35% when the demand for arms increases by 1%. This technological change even reaches 0.6%, or even 1%, in companies experiencing very high tension. The author calls this technological change “learning by necessity” (“learning by necessity”).
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