Government purchases, government transfers, and the post-1970 slowdown in US economic growth

This article shows that the post-1970 slowdown in U.S. economic growth can be explained by a shift in fiscal policy away from government purchases and toward transfer payments. Two endogenous growth models that include govern ment purchases and transfers imply a relationship between these variables a nd long-run growth. Empirically, the simultaneous decline in the fraction o f output purchased by federal, state, and local governments and rise in tra nsfer payments around 1970 dramatically overpredict the growth slowdown of the early 1970s. The growth rate is predicted to have risen in the absence of this change in fiscal policy. (JEL C22, E62, H50, O41).