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  • Government Spending vs Economic Growth

    The Wall Street Journal reports: “President Barack Obama will call for new government spending on infrastructure, education and research in his State of the Union address Tuesday … Mr. Obama will argue that the U.S., even while trying to reduce its budget deficit, must make targeted investments to foster job growth and boost U.S. competitiveness in the world economy.”
    The Obama administration clearly believes that more government spending is necessary for better economic growth. But what does the data say? The 2011 Index of Economic Freedom reports:

    Whatever the ideal level of government may be, the political and economic developments of the past year have made clear that in many societies, particularly among the more developed countries, the limits of appropriate or tolerable government spending may have been reached or even surpassed.

    Countries that reduced government spending had economic growth rates almost two percentage points higher in 2009 than countries whose government spending scores worsened, and countries with the highest rates of government spending had gross domestic product (GDP) growth rates 4.5 percentage points lower on average than countries where government spending was best contained.

    You can read the Index’s chapter on The Limits of Government, here. On how the Index scores Government Spending, here. The entire Index is here.

    Posted in International [slideshow_deploy]

    9 Responses to Government Spending vs Economic Growth

    1. George Colgrove, VA says:

      ". . . the limits of appropriate or tolerable government spending may have been reached or even surpassed.

      Countries that reduced government spending had economic growth rates almost two percentage points higher in 2009 than countries whose government spending scores worsened, . . ."

      The thing is did these government cut just a little. What if the governments cut even more. How much better would things have gotten.

      This is a basic axiom – governments do not produce a thing. They just spend. There are very basic and necessary things for governments to do, but there are not many. So long as dollars are circulating, the economy will do well. The federal government takes dollars out of circulation for which there will be no value beyond that point from that extraction.

      But this is not the problem. We could have a federal government spending $2.5 trillion every year and be fine. So long as there are tax dollars behind that spending we are in good shape. An economy can occur in lue of that wasted financial resource.

      What is hurting us now is that we must stop deficit spending. To do that we need to carve a trillion out of that $2.5 trillion budget to pay the mounting interest payments and principal for the next three or so decades.

      What we have done last year, two years ago, three years ago, a decade ago is that we robbed ourselves of a fully funded government today. Moreover, we have robbed our children and their children of a fully funded government. If we are to assume $2.5 trillion is the ideal cost of government, well we have to reduce that by a trillion to pay the debt. Therefore, $2.5 trillion may be ideal, but we will only get $1.5 trillion to run it.

      So the basic problem is that first we need to cut government spending to improve the economy. But we will need to cut even further to pay back our financial irresponsibility. The cuts necessary to achieve tax cuts and paying off the debt to spawn significant economic growth would have to be extremely deep. So deep that we may need to write the federal government off and find solutions at the local level with what we have. This includes entitlement programs, national defense and all other domestic needs.

      All I can think of is the wisdom of the founders. I wonder where we would be if in FDR's days we never grew the federal government we have today and just stuck to the original ideas.

    2. George Colgrove, VA says:

      Actually this is all that has to be said:

      "In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. " – Reagan

      Why is it that when I hear Reagan speak, it sounds like he is talking about today?

      • BobL says:

        The strength of the United States is directly linked to a strong central government. The military , the road system that has allowed this country to have the strongest economy in the world, civil rights, that freed so many people from the brutality and racism of local governments, technologies that have made the United States the leader in virtually every area imaginable, the educational system. It is a strong central government, working within constitutional limits, that has forced states to live up to standards that as individuals we would never hope to achieve. I'm tired of hearing that government is the problem not the cure. It is our best hope, and it has to be paid for. You have to raise taxes to pay for services. the point is that our government should be spending more, not less. If you want the government to create jobs, it costs money. Wealthy people, including myself, because I make a lot of money, need to be taxed at higher rates that reflect the higher standard of living we enioy. I love our central government, despite its faults, and I'd like to see it do more, not less. Yours is a knee jerk reaction to forces that you do not understand and cannot control. I sympathize, but respectfully disagree.

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    5. Kevin H, college par says:

      Over the past twelve months, we have created more than one million net new jobs in the private sector — while government employment has shrunk by more than 250,000.

      Corporate profitability has reached record highs, meaning that companies can afford to hire as demand revives.

      Including dividends, the stock market has gained more than 10 percent this year.

      If this is "socialism," what would capitalism look like?

    6. Tom Beebe, St Louis says:

      One recet idea to reform the housing market caught my eye. Seeing the devestation to our economy by Barney Frank's effort to "democratize home ownership" (by making loans to those who can't repay them), some have suggested requiring higher downpayments, upwards of 30%. Want to bet the screams from our bloated housing industry, claiming this will only make things worse, will drown this out? Here's a simple modification: raise the downpayment requirement in steps, with the steps well advertised inadvance. If you wanted to get into a house, and knew the downpayment would go up 5% each of the next 5 years, I bet you woulld bust a gut to come up with that downpayment now. This modification would both spur home buying and more responsible ways of doing it, e.g. saving for that downpayment rather than borrowing more than you can afford to repay. There are ways to help the recovery and do it responsibly.

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    8. Bobbie says:

      You're wrong, Kevin. What jobs did you create? NOTHING but illusion. Ridding regulations would allow the freedom of the people to create jobs without government intrusion so the president can focus on his rightful Constitutional duties!

      Why is spending your only answer, Mr. President? Infrastructure is paid with tax and gas tax dollars, no more money needed there. It's been proven over many years, as I have school aged children and one that graduated, more money is only wasted and extorted. No money needed there. And research? Research on what, further indoctrination? A peaceful transition into socialism? Nonchalant brainwashing?

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    Big Government Is NOT the Answer

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