Well, government spending never has increased economic growth.
(Part one of two)
President-elect Donald Trump proposed a new $1 trillion infrastructure spending and tax cut package which his campaign promised is “a golden opportunity for accelerated economic growth and more rapid productivity gains.”
But is more government spending a golden opportunity for economic growth? The answer to that question would surprise most establishment economists.
Former Princeton University Professor Paul Krugman wrote for The Guardian of London last year that more government spending stimulates an economy and less government spending hurts an economy: “Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.” Krugman also claimed that “Standard macroeconomics said that cutting spending in a depressed economy, with no room to offset these cuts by reducing interest rates that were already near zero, would indeed deepen the slump.”
But Krugman’s statement is mythology, propped up by subjective analysis of data that results in a confirmation bias. An objective look at the largest available set of macroeconomic data, at the experience of all the world’s Advanced Economies using the International Monetary Fund’s World Economic Outlook Database, reveals a different reality. The WEO contains economic growth, spending and other data on countries since 1980. The WEO data on the world’s 39 Advanced Economies reveals that more government spending – or even less government spending, in the form of austerity cuts – has had zero measurable impact upon official economic growth as measured in real per-capita Gross Domestic Product, either during the year spending increased [See Figure 1] or the following year [Figure 2].
The record of the IMF data is clear: Every dollar of Obama’s fiscal “stimulus” during the Great Recession did absolutely nothing to promote economic growth. Actually, Obama’s American Recovery and Reinvestment Act did a couple of things not related to economic growth: It won re-election numerous politicians who were perceived as “doing something” about the 2008-09 economic crisis, and it furthered the economics career of Paul Krugman and other big government Keynesians.
More significantly, however, it created a massive government money-hose to all the wealthy interests who were politically connected, which cannot but act as a catalyst for increasing income inequality. How could it be otherwise? The federal government taxes the tips of waitresses and Uber drivers, and then gives those tax dollars in the form of bailouts to huge banks like Goldman Sachs and Bank of America or to politically connected corporations like General Motors, Tesla, the teachers unions, and green energy companies that were friends of – and political donors to – the Obama administration.
Yet, many of the same economists and politicians who cheerleaded that massive transfer of wealth from the working poor to the crony capitalists on Wall Street are typically the ones who preach loudest against income inequality.
Krugman and other Keynesians typically analyze a much smaller dataset, and look primarily at countries in the midst of economic distress (such as Greece) whose irresponsible governments have already been forced into austerity measures by market conditions. Or, they admix both spending cuts and tax increases into a general category of “austerity” and erroneously conclude that spending cuts hurt economic growth. Interestingly, the IMF itself authored a 2010 study “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation” on a subset of its own database that acknowledged government spending cuts had little-to-no impact upon GDP (within the margin of error) while finding that tax increases as a form of what it termed “fiscal contraction” had a sharply negative impact upon economic growth. Yet establishment economists like Krugman continue to link to the IMF study as evidence that spending cuts hurt economic growth and spending increases stimulate economic growth. The IMF study did conclude that more spending paid for by higher taxes becomes a net economic drag on the economy that year, as most free market economists would expect. The IMF data also demonstrates [Figure 4] that more government spending financed by deficit borrowing is a perpetual drag on economic growth when it increases national government debt levels.
Even if one concludes from the data [Figure 1] that more government spending creates a small increase in GDP, and is not a result of cuts from nations already in economic distress (or freer spending by governments already growing), spending increases have a one-and-done economic impact with the economy. They produce zero benefit after the year in which the money is spent [Figure 2]. But taking on debt is a permanent, ad infinitum, drag on economic growth … until the debt is paid off with spending cuts or tax increases.
Not surprisingly, Obama’s stimulus pushed the national debt level over the 100 percent of GDP mark – double the debt proportions of the Reagan era – and has coincided with the weakest economic growth (about two percent per year) of any recovery during the modern era. This can be contrasted with the four percent or greater average GDP growth during the Reagan era recovery.
Trump’s $1 trillion infrastructure spending plan would almost certainly yield precisely the same economic results as the smaller Obama infrastructure program, as it is based upon the “more-government-spending-means-more-economic-growth” mythology. In other words, should Congress pass the Trump infrastructure program, it will be paid for with lower economic growth rates immediately as a result of tax increases or in perpetuity in the form of the economic drag associated with carrying a larger national debt.
(Part Two Tomorrow: Economic Stimulus? Try More Savings and Lower Debt)
