This
from the St. Louis Fed offers another look at the theory (bold is mine):
Looking at government spending more generally suffers
from the problem that the spending may be correlated with economic
activity: The government may spend more during a recession (as with
ARRA) or more during an expansion (when tax revenues are high). This
might bias the results, which economists call “an endogeneity
bias.” Military spending, on the other hand, is likely to be determined
primarily by international geopolitical factors rather than the nation’s
business cycle. Specifically, we used a dataset developed in pioneering
work by Valerie Ramey and, on several of the papers, her co-authors
Michael Owyang and Sarah Zubairy.
To control for potential “anticipation effects,” Owyang,
Ramey and Zubairy used historical documents to construct a time series
of military spending news shocks. This allowed them to disentangle the
time of military spending from when the public learned that military
spending was going to change in the future.
Those authors looked at the
output response to the spending shocks. They found a small effect of
military spending on output and that the size of this effect did not
depend on whether the economy was slack or not.3 Specifically, a $1
increase in government spending caused a less than $1 increase in gross
domestic product (GDP).
We used a similar methodology and found that military spending shocks
had a small effect on civilian employment. Following a policy change
that began when the unemployment rate was high, if government spending
increased by 1 percent of GDP, then total employment increased by
between 0 percent and 0.15 percent. Following a policy change that began
when the unemployment rate was low, the effect on employment was even
smaller.
In the event of another recession, policymakers have a number
of stabilization tools at their disposal, including quantitative
easing, negative interest rates and tax relief. The research discussed
above suggests that one other device, namely countercyclical government
spending, may not be very effective, even when the economy is slack.
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