The government has spent billions of our dollars and now the economy is doing (relatively) well. And as every good student of statistics knows, correlation proves causation. Based on this divine truth, the government has claimed credit, and many journalists and pseudo-economists have believed them.
But if expansionary fiscal policy leads to higher growth, then that rule should be true all around the world. So let’s have a look at the outcomes for a range of major economies.
The data for economic growth (% of GDP, estimate for 2009) and the size of the discretionary fiscal policy (% of GDP, combined 2008 & 2009) come from the IMF, except for the Australian growth estimate, which comes from the budget documents and is for 2009/10 (and may be revised up again shortly).
As the graph shows, there is almost no correlation between discretionary fiscal policy and economic growth (correlation coefficient = 0.0651, p-value 0.825, not statistically significant). Yes, Australia had lots of fiscal policy and relatively good growth (we are the dot above the 3.5) … but Japan, Russia, Spain and the US also had lots of fiscal policy with worse results.
Of the countries with relatively less fiscal policy (under 2%), there is also a range of outcomes. Brazil, Canada and France have generally done better than the above “Keynesian countries”. While the UK, Italy, Germany and Mexico have achieved growth rates about the same as the “Keynesian countries”.
The two outliers in this picture are China and India — one Keynesian and one not.
On it’s own, this does not prove anything. The performance of different economies is caused by many different factors which cannot be captured by looking at a simple correlation. But if people want to take a simple look at the “stimulus-growth” correlation, they should consider the whole world, and not just Australia. And the evidence from the whole world seems to back up what all good economists already know — that active fiscal policy doesn’t work.
UPDATE: Todd Craig pointed out that I had America in slightly the wrong place, and has provided an updated graph which includes the country names for each dot. Thanks Todd.