Monday, March 21, 2005

Government growth hurts the economy

A growing government is contrary to America’s economic interests because the various methods of financing government—taxes, borrowing, and print­ing money—have harmful effects, according to Daniel J. Mitchell, Ph.D., McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, in an article on the Heritage Web site from which this information was taken.

This is also true, he said, because government spending is often economically destructive. The many reasons for the negative relationship between the size of government and economic growth include:

  • The extraction cost. Government spending requires costly financing choices.
  • The displacement cost. Government spend­ing displaces private-sector activity.
  • The negative multiplier cost. Government spending finances harmful intervention.
  • The behavioral subsidy cost. Government spending encourages destructive choices.
  • The behavioral penalty cost. Government spending discourages productive choices.
  • The market distortion cost. Government spending hinders resource allocation.
  • The inefficiency cost. Government spending is a less effective way to deliver services.
  • The stagnation cost. Government spending inhibits innovation.

The common-sense notion that government spending retards economic performance is bol­stered by cross-country comparisons and aca­demic research. International comparisons are especially useful. Government spending consumes almost half of Europe’s economic output—a full one-third higher than the burden of government in the U.S. This excessive government is associated with sub-par economic performance:

  • Per capita economic output in the U.S. in 2003 was $37,600—more than 40 percent higher than the $26,600 average for EU–15 nations.
  • Real economic growth in the U.S. over the past 10 years (3.2 percent average annual growth) has been more than 50 percent faster than EU–15 growth during the same period (2.1 percent).
  • Job creation is much stronger in the U.S., and the U.S. unemployment rate is significantly lower than the EU–15’s unemployment rate.
  • Living standards in the EU are equivalent to living standards in the poorest American states—roughly equal to Arkansas and Mon­tana and only slightly ahead of West Virginia and Mississippi, the two poorest states.

An International Monetary Fund study con­firmed “Average growth for the preceding 5-year period…was higher in countries with small governments in both periods.”

According to the Organi­zation for Economic Co-operation and Develop­ment, “Taxes and government expenditures affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure— e.g. two-thirds of what was observed over the past decade in the OECD sample— could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6–0.7 per cent.”

No comments: