The Macroeconomics of Government Spending: Distinguishing Between Government Purchases, Government Production, and Job Guarantee Programs

By Thomas Palley

PKES Working Paper 2107

June 2021

This paper reconstructs the Keynesian income – expenditure (IE) model to include distinctions between government purchases of private sector output, government production, and government job guarantee program (JGP) employment. Analytically, including those distinctions transforms the model from a single sector model into a multi-sector model. It also surfaces the logic behind the automatic stabilizer property of JGP employment. The model is then extended to include Kaleckian income distribution effects which contribute to explaining why expenditure multipliers vary by type of fiscal expenditure. The Kaleckian version generates a new balanced budget multiplier driven by changed composition of government spending. It also illuminates some macroeconomic implications of privatization of government produced services.

Keywords: Government spending, government production, balanced budget multiplier, automatic stabilizers, job guarantee program

JEL classification: E10 E12 E62