President-elect Donald Trump’s proposed $1 trillion infrastructure spending program promises “accelerated economic growth.” But an analysis of data from the IMF’s World Economic Outlook database revealed that more government spending is not the path to economic growth.

[See part one of this series: Will Trump’s Infrastructure Stimulus Spending Work?]

So if government spending doesn’t drive economic growth, what does drive it? The IMF data demonstrates that there are two major factors in a country’s economic growth: Savings and low government debt. Of the two, savings is by far the more powerful factor. [see Figure 3]

The IMF database measures the National Savings Rates against economic growth, as measured by the annual average growth rate for the world’s 39 Advanced Economies. The data indicates stronger growth for nations with higher than the average 24.5 percent National Savings Rate and weaker than average growth for nations with lower than average savings.

The United States has been among the nations with below average savings since the 1980s, and has had below average growth since that time. With a current savings rate of 17 percent, the United States loses almost a full percentage point of per capita economic growth every year because of insufficient savings compared to gains with nations which have average savings. Compounded over time, this amounts to a substantial economic disadvantage.

Much of the variance in the data-points on savings rates is accounted for in government debt levels. This can be observed in a 3-D chart [Figure 5] which measures both National Savings Rates and Government Debt as a proportion of GDP against GDP growth. Government debt has a negative role in economic growth, though a smaller role than savings rates.

Why a low savings rate?

There are plenty of reasons why the United States has a low savings rate compared with other Advanced Economies. Lowered interest rates are one major disincentive for savings. So the U.S. Federal Reserve Bank, which has kept interest rates near zero for almost a decade, is partly to blame. There’s really no point in putting your money in the bank when it pays less than the rate of inflation. And low interest rates also contribute to inflation, which acts as a tax on poor people’s money held in cash and labor. The wealthy are far less impacted by inflation because unlike the poor most of their assets are held in stocks, bonds, real estate and other hard assets which are largely immune to currency inflation. Inflation acts as a double-incentive for the working class to spend before the value of the dollar is eaten up. But low interest rates are not the only reason the United States has lower than average savings rates. Some European nations with high savings rates – such as the Swiss and the Swedes – currently have negative interest rates from their central banks.

There are many other factors in national savings. Some countries force workers to save. Australia has a retirement savings plan called “Superannuation,” which forces Australians to save 9.5 percent of their income. Singapore has an even more militant forced savings plan – more than 35 percent of worker wages – with its Central Provident Fund. But the United States has a pay-as-you-go system for its Social Security and Medicare programs, resulting in no individual account balance, no real savings and no investment.

One of the key claims of Keynesians is that government spending or “stimulus” during the Second World War set off the post-war boom in the United States. But the reality of the modern data reveals that it was the years of war-era rationing – and resultant forced savings – that financed the post-war growth. Indeed, the federal government underwent a massive reduction in size and scope at the end of the war, and experienced only a brief recession.

By way of contrast, Austrian School and other free market economists have long stipulated that only savings and investment can create economic growth. The data confirms the Austrian thesis, and refutes the Keynsian/Behavioral School idea that government spending can create economic growth.

Standard “mainstream” Keynesian or Behavioral School economics also holds the view that deficit spending and taking on debt has little-to-no impact on economic growth, or at the very least an impact smaller than the supposed positive impact of massive government “stimulus” spending. Professor Krugman claimed in an 2015 Guardian article that “By late 2008 it was already clear in every major economy that conventional monetary policy, which involves pushing down the interest rate on short-term government debt, was going to be insufficient to fight the financial downdraft. Now what? The textbook answer was and is fiscal expansion: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets. But won’t this lead to budget deficits? Yes, and that’s actually a good thing.”

Dr. Krugman’s claim is belied by the data. The level of government spending has no measurable impact on economic growth. [See Figure 1] So the “benefits” of increased government spending is zero. But what is the impact of government accumulating debt through deficit spending? Krugman and other establishment economists assert that as long as interest rates are low and borrowing is nominally cheap, then the economic cost of accumulating debt is virtually non-existent.  On the economic impact of government debt, there’s a wealth of data. Government debt is a secondary factor in economic growth – less than national savings – but still significant. [See Figure 4]

IMF data demonstrates that nations with a high government debt have measurably lower economic growth rates.  This chart shows the impact of national debt rates upon average GDP growth rates.

This difference was also confirmed by the University of Massachusetts study in 2013 by Thomas Herndon, Michael Ash and Robert Pollin. The study was conducted to debunk the claim by Harvard University economists Reinhart and Rogof that there was a threshold of government debt at 90 percent of GDP at which economic growth fell off a cliff, and the Herndon-Ash-Pollin study did its job well. The Herndon-Ash-Pollin study exposed errors in Reinhart and Rogof’s spreadsheet and debunked the “debt cliff” myth. But they also confirmed that there is a heavy price to pay for carrying a large national debt.

If the Trump administration is interested in sparking more vigorous economic growth, the path to it will not be more government spending, but paying off debt with spending cuts and ending inflationary monetary policies that curb savings rates.