Does More Government Spending Boost the Economy?
Challenging the status quo thinking that more government spending boosts the economy, a new report released by the Pacific Research Institute found that bigger government does very little to boost the economy. Part 2 of Beyond the New Normal concludes that high taxes and government spending actually takes away the ability of people to spend and invest, and grow the private-sector.
“Government often ‘invests’ tax dollars on new programs and assumes that if you spend the people’s money, you will grow the economy,” said Dr. Wayne Winegarden, PRI Senior Fellow in Business and Economics, and co-author of Beyond the New Normal. “What Washington fails to understand is that government overspending doesn’t grow the economy. The best way to create jobs and lift people out of poverty is to reduce high tax rates and let Americans decide for themselves how to spend or invest their money.”
Among the key points:
- Total federal, state, and local government expenditures are near all-time highs relative to the ability of taxpayers to afford these expenditures.
- When government spends money, all that is known are the costs that have been incurred. Without further analysis, it is unknown whether these expenditures are adding value to the economy. Government expenditures only add value to the private economy only when the benefits from those expenditures exceed the economic costs imposed on the economy.
- Tracing out the growth and composition of current government expenditures, as well as the large costs inherent in the current tax system, additional government expenditures are not meeting this criterion.
- Treating the costs of providing government goods and services as if they represent the value added from that spending creates a distorted view of the impact from government expenditures on the economy. It automatically assumes increasing the cost of government increases the value created for the private economy. This assumption is particularly problematic given the current size and composition of government expenditures.
- Additionally, whether government expenditures are adding value to the economy should also be judged based on the goals of the government programs. For instance, based on the original goal of income support programs (e.g. the elimination of poverty), expenditures on income support programs are not achieving their designated goal.
- Policymakers should focus on assessing the value created by government expenditures, and acknowledging that government expenditure programs with low or negative net value do not stimulate the economy.
Beyond the New Normal is a multi-part study by Dr. Wayne Winegarden and Niles Chura, which makes the case that future US economic growth can meet – or exceed – past growth trends if the right economic policies are adopted.
Dr. Wayne Winegarden is a Senior Fellow in Business and Economics at Pacific Research Institute. He is also the Principal of Capitol Economic Advisors and a Contributing Editor for EconoSTATS. Niles Chura is the founder of Ouray Capital.
(Source: Pacific Research Institute)