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.”