Comment on “The Fall and Rise of Keynesian Fiscal Policy”

• Date: 01 December 2012
• DOI: http://doi.org/10.1111/j.1748-3131.2012.01229.x
• Author: Mitsuhiro Fukao
• Published date: 01 December 2012

Comment on “The Fall and Rise of Keynesian

Fiscal Policy”

Mitsuhiro FUKAO†

Keio University

JEL code: H30

Auerbach’s (2012) paper provides an overview of the current academic understanding of

the effectiveness of fiscal policy and the actual use of fiscal policy in the USA. Its conclu-

sions are rather agnostic because of the endogeneity of fiscal policy variables. Some of

the changes in government expenditures or tax revenues reflect autonomous changes in

the economic activities. Moreover, some of the changes in the federal fiscal variables may

be offset by the changes in the state- or country-level actions. In this commentary, I

would like to add another dimension to the measurement of the effectiveness of fiscal

policy, namely, the measurement of the production by the government in the current

system of national accounts (SNAs).

The gross national product (GDP) of a country is equal to the sum of the consump-

tion and investment in that country. The government’s payments to civil servants and its

suppliers of goods and services are counted as government consumption, and its pay-

ments for building public infrastructure are counted as government investment. In

Japan, the investment by public companies such as government-owned expressway com-

panies are also counted in as fiscal policy.As a result, the figures for quarterly GDP show

“public investment” rather than “general government investment,” and the former is the

sum of general government investment and the investment by public companies. On the

expenditure side of the SNAs, transfer payments from the government such as public

pensions and unemployment insurance are not included.

If the government hires an unemployed person and pays his/her salary as a civil

servant, this payment is counted as government consumption. This government con-

sumption directly pushes up GDP by the same amount because SNA “assumes” that the

hired civil servant produces “public service.” If the government starts a public construc-

tion project and this unemployed person is hired as a construction worker, his salary is

counted as a part of public investment. This investment expenditure also pushes up GDP

by the same amount. However, if the government pays the benefit of unemployment

insurance to the same person, this payment is not counted as GDP. Only the second-

round effect such as the consumption expenditure of this person is counted as GDP.

Then here is the problem. If the hired civil servant is incompetent and produces no

public service of any economic value, the true measure of GDP should not increase. If

†Correspondence: Mitsuhiro Fukao, Faculty of Business and Commerce, Keio University, 2-15-45

Mita, Minato-ku, Tokyo 108-8345, Japan. Email: fukao@fbc.keio.ac.jp

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doi: 10.1111/j.1748-3131.2012.01229.x Asian Economic Policy Review (2012) 7, 176–177

© 2012 The Author

Asian Economic Policy Review © 2012 Japan Center for Economic Research

176