International Study Confirms Government Spending Crushes the Economy

Back in June, Princeton professor of economics Alan Blinder wrote a Wall Street Journal op-ed mocking what he called “The GOP Myth of ‘Job-Killing’ Spending.”  It stuck in his craw that Republicans were saying spending itself was damaging to the economy, not merely the taxes necessary to finance all that spending.  He applied a thick layer of sarcasm to the topic:

It was the British economist John Maynard Keynes who famously wrote that ideas, “both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else.” Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs.

No, that’s not a typo. House Speaker John Boehner and other Republicans regularly rail against “job-killing government spending.” Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.

I thought his entire piece was remarkably sloppy and silly for someone who is supposed to be a professor of economics.  Among other things, he ignored the opportunity costs imposed by massive government spending, the eventual necessity of paying all those deficit bills Barack Obama has been racking up, and most importantly  the blizzard of false economic data pumped into the private sector when Big Government attempts to create markets by fiat. 

The question of whether government spending, independent of high tax rates, injures the economy is of great concern, because Democrats always deflect the harmful effects of taxation by insisting that either faceless rich people can be taxed to provide the money, or that it’s worth borrowing mountains of money to pay for vital Big Government programs.  Neither of these things are even remotely true, but the wonderful benefits of big spending, and the heartless misery inflicted by austerity, are loudly invoked to drown out concerns about how the Really Great Society will be funded.

Thus it was intriguing to see a new European Central Bank study (hat tip to Veronique de Rugy of National Review and Ace of Spades) that used data from 108 national economies to demonstrate that “government consumption is consistently detrimental to growth.”  This is true “irrespective of the country sample considered.”  De Rugy ties this to domestic studies that have found “federal spending in states caused local businesses to cut back rather than grow,” which flies in the face of the almost unquestioned conventional wisdom that such spending promotes business growth by creating opportunities and providing infrastructure.

The ECB study acknowledges that government spending can do some good, but in excess it reduces economic growth through “government inefficiencies, crowding-out effects, excess burden of taxation, distortion of the incentives systems, and interventions to free markets.”  That sounds consistent with the “blizzard of false data” concept.

Not surprisingly, relatively disciplined and efficient governments hurt the economy less than those which are corrupt and inflexible.  High-quality government institutions bestowed more pronounced benefits upon the economy when the overall size of the government was smaller, and poor quality institutions hurt more when the total size of government increased.

Interestingly, the study found “the negative effect of government size on GDP per capita growth is stronger at lower levels of civil liberties and political rights.”  To expand upon these findings, it seems logical that government growth inevitably retards civil liberties and political rights beyond a certain point, so Big Government becomes an avalanche of failure.  The expansion of the State destroys the private-sector freedom that might otherwise mitigate the damage from big spending.  I wonder if we haven’t been watching ourselves sail right across that terrible boundary.