Government spending is inefficient way to grow

Published November 23, 2014

By John Hood

by John Hood, John Locke Foundation and NC SPIN panelist, published in Rocky Mount Telegram, November 22, 2014.

Although I support the tax cuts and other fiscal policies adopted by the N.C. General Assembly and Gov. Pat McCrory over the past two years, I repeatedly have urged policymakers and commentators alike to avoid making grandiose claims about those policies’ immediate effects on North Carolina’s economy.

It’s not that I think legislative decisions about state budgets are irrelevant to economic growth. On the contrary, my reading of the past 25 years of academic research on economic growth suggests that state policy has a statistically significant connection to job creation and income gains. All other things being equal, states with smaller governments, lower taxes and less regulation have healthier, faster-growing economies than other states do. There are exceptions. But that’s the general tendency.

However, these effects are most evident over time, as changes in incentive and outlook lead to changes in the behavior of entrepreneurs, investors, professionals, workers and consumers. States lack the tools – and ought to lack the intent – to manipulate the economy in the short run. They can’t run operating deficits and have no power to inflate the money supply (thank goodness).

How state governments can contribute to economic prosperity is by delivering high-quality, growth-enhancing services. The real state policy debate, in North Carolina and elsewhere, is about the definitions of the terms “high-quality” and “growth-enhancing.” For liberals, the modifiers seem to have no real meaning. Virtually all government spending is good for the economy, they suggest, which means that virtually all tax cuts that have the effect of constraining government spending must be bad for the economy.

Their position is logically incoherent and empirically flawed.

We all know from our own personal experience that some of our expenditures are intentionally frivolous, some are intended to serve our long-term interest but don’t turn out that way, and some actually boost our future security, happiness or earnings.

As imperfect human beings, we can try to do our best and still err. The same is true for any institution created and run by human beings, including government.

Empirically, the Left’s position may have been plausible decades ago. But the past quarter-century of academic research has simply demolished it.

Most studies find no positive relationship between state spending and economic growth. In fact, the only category of state spending for which most studies find positive economic effects is public safety – law enforcement, fire protection and the court system.

Even for major state functions such as infrastructure and education, the evidence is mixed. While increasing mobility and literacy are obviously valuable goals, states often pursue them ineffectively. They squander money on low-priority projects or initiatives. The economic costs of taxing households and businesses to finance the programs exceed the scant benefits they produce.

The real reason, then, to reduce public-sector tax burdens and spending levels is not to engineer some kind of short-term stimulus. It is, rather, to maximize investment in assets that enhance growth in the long run – by which I mean the sum of private investment (the result of taxpayers keeping and deploying more of what they earn) and public investment (the result of governments cutting back on wasteful spending in order to finance high-demand infrastructure or truly effective education reforms, both requiring many years to come to fruition).

A study just published in the journal Econometric Reviews by University of Chicago professor Arnold Zellner and University of Pretoria professor Jacques Kibambe Ngoie provides an excellent case study of how this process works. They found that reductions in personal and corporate tax rates in the U.S. were followed by higher rates of economic growth. Here’s how they explained the result: “The private sector is allowed to manage a larger portion of its revenue, while government is forced to cut public spending on social programs with little growth-enhancing effects. This broadens private economic activities overall.”

North Carolina’s economy continues to improve. Indeed, our recent economic performance exceeds regional and national averages. These are promising trends, certainly, but it remains too early to declare outright victory (or defeat) for the state’s recent changes in fiscal policy.

http://www.rockymounttelegram.com/opinion/columnists/john-hood-government-spending-inefficient-way-grow-2717621

 

November 23, 2014 at 11:54 am
Norm Kelly says:

John destroys the schemes of the libs better than anyone else in the state. He is articulate, uses facts, statistical, and historic information to support his position and to prove the failures of the lib schemes. What does the left have to counter this? What does the left use to promote their schemes? They DON'T use facts because they can't use facts. Two reasons: one the facts simply do NOT support the schemes of the left. Second, and maybe more important, libs are incapable of recognizing facts. This leaves libs with 2 ways to force their schemes upon us. First, they lie. They distort the truth. They hide their schemes behind words like "it's for the children". And they believe the majority of voters are just stupid enough to go along with them. (mind you, not my words, but the words of at least 1 who was employed by lefties to implement an unwanted program that is doomed to failure!) Second they demonize their opposition and oftentimes implement their schemes by using the courts to go along with their failed plans. Generally speaking a majority of voters do NOT accept lib schemes and failed policies, so they must force their schemes upon us using the court system, hopefully by using judges THEY have appointed or by having voters pick a judge without knowing anything about them; especially party affiliation. They also claim their opponents are 'racist' when they can't come up with any other way to get their schemes accepted.

Libs also base their schemes on long-term outcomes. But when they reference conservative plans/ideas, they MUST look short-term in order to demonize. And when they can't prove anything else, they lie. Did I already say that? Maybe because it's such a used, worn-out, default position of the left. Witness the Duke coal ash spill. DENR under the control of libs didn't just allow the coal ash ponds to exist. Over the course of decades, according to the leftie N&D which ALWAYS supports libs, the coal ash ponds were allowed to LEAK, knowing they were leaking hazardous materials, by DENR when the Socialist Party was in control of Raleigh. The facts, once again, do not support the schemes of the libs. Their only defense is to lie, distort, fabricate.

Thanks John for what you do to support intelligent, thinking, freedom-loving citizens. Thank you for using facts so well to put the schemes of libs in perspective. It's people like John that are the worst nightmare of any lib, whether politician or editorial writer.

November 23, 2014 at 2:27 pm
Richard Bunce says:

All them money in either private or governments accounts gets put to use one way or the other and I find government spending too often not being put to "good" use that justifies the government coercive confiscation of the peoples income/wealth.