Monday, August 17, 2009

8 Reasons Why Big Gov't. Hurts Economic Growth

In this new video, Dan Mitchell (Cato Institute) explains how and why excessive government spending undermines economic growth.

The chart below displays empirical evidence that confirms the material presented in the video, it's reprinted from the 1998 study
The Size and Functions of Government and Economic Growth by James Gwartney, Robert Lawson and Randy Holcombe. The graph shows that as the size of government (share of GDP) increases for OECD countries, economic growth (real GDP) suffers. Economic growth is more than 4 times greater (6.6% vs. 1.6%) in the countries with the lowest government spending (<>60%).

Originally posted at Carpe Diem.


At 8/17/2009 12:28 PM, Anonymous Cooper said...

A few things, did a similar study for the EU block and had a similar chart. Their webpage is down so I can't link it directly.

I noticed in Joint Economic Committee report that on page 6 (pdf page 9) the two exibits #a and 3B look like they add up to ~51%.

So I went back the the FED data for the use and pulled

Government Consumption (GCEA)
Private Domestic Investment (GPDIA)

normallizes to GPD and summed them up, and via a pattern.

It looks like total %GDP between government and private held in the 31-39% range from the end of the war ('51) to ('84) Then Shifted to a holding pattern at 35% from 1991 to the present.

Seams like a strong argument for the "crowding out" effect.

At 8/17/2009 1:15 PM, Anonymous Junkyard_hawg1985 said...

That is a GREAT chart! The data does not surprise me in the least. For fun (yes I'm a nerd), I had done a economic model of goat herding at different tax rates. Low and behold, economic growth (as measured by the size of the herd) fell as tax rates increased. Also, ten year tax revenues started dropping above 28% tax rates. In 2009, government spending at all levels is projected to be 45%. I hate to say it, but when I see Congress increasing government spending to "stimulate" the economy, it really gets my goat.

At 8/17/2009 1:18 PM, Blogger juandos said...

Hey Cooper what an amazing site which is now back up and running...

Work & Wealth For All

Thanks for putting it out there...

'Brussel's Leading Think Tank', eh?

A very interesting site and the following document has some real nuggets: Beyond The European Social Model

At 8/17/2009 2:26 PM, Blogger KO said...

The problem is most members of Congress couldn't even draw a conclusion from the chart other than the left side columns are bigger than the right ones.

Even the "economic advisors" to the WH claim the government spending a dollar results in more than a dollar of economic activity. Well that's technically true, but they fail to add the taking a dollar away from the private sector part of the equation.

At 8/17/2009 4:30 PM, Anonymous Cooper said...

Sadly I still can't access the webpage at workforall. Must be something on my end. The report I enjoy is here.

Now as far as the goat comment.
It struck me over the weekend that there may be a smig of truth to the concept of government borrowing durring resessions. Now I was initially thinking about this from the point of view of "the government must borrow first before it spends." But then it struck me that durring a crisis like we have now, when people are "fleeing to the safety of trsuries" that basicly implies that money is being thrown at the government, so who would blaim them for taking it ??

That way when tresury yields dive the gov can step in and borrow heavly WITHOUT crowding out other investors because they Want to buy gov debt.

However, when the market decides to switch back to equities over tresuries the gov must also then stop borrowing equally quickly. Something I cannot posibly see them doing. But if done propperly the yield on the short term debt should remain relativly flat as excess demand is met with extra supply.

Third topic. I see all the ups and downs in the private investment vs government spending but when I dont have the statistical expertiese to determine is class: chicken or the egg. To shortfalls in investment lead to resessiosn which lead to government "simulous" or does excessive governemnet spendign lead to crowing out which leads to resessions?

At 8/18/2009 2:09 PM, Blogger juandos said...

Case in point, big government spending didn't solve a perceived problem...

From the Cato Institute: $9 Trillion Didn't End Poverty -- What to Do?

September 1, 2004


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