Government Spending vs Private Spending

[YardleyLabs]

There is often a lot less than meets the eyes in these types of summaries. The article being quoted may be found at http://www.heritage.org/research/bud...ppl.cfm#_ftn11.

The first argument, labeled "Extraction Costs", is based on Martin Feldstein's concept of "economic burden". This is an accepted principle that there are distinct costs associated with increasing taxes that reduce the effectivenees of tax increases in raising revenues. While this has been analyzed in some detail and is widely accepted, the measurement of that cost is tricky and it is even harder to separate those costs that are related to change and complexity from those that are permanent. The real argument behind much of the econopmetric studies has been to try to identify methods of taxation that minimize distortions associated with tax systems that are complex or that favor some types of behavior over others.

The second argument, labeled "Displacement Costs" basically argues that goernment spending displaces more productive private spending. Most of the references included in the article are actually related not so much at government expenditures as at government deficits, noting that they reduce the amount of capital available for productive investments. Thise same studies (for example the cited EU study, which may be found at http://ec.europa.eu/economy_finance/...on10063_en.pdf, discuss actual deficits incurred relative to a "desirable" level of deficit that may help to stimulate an economy in trouble. Of course, this same model makes it clear that deficits incurred when an economy is growing rapidly are harmful, a point I have made frequently. A number of other references are based on a labor displacement effect when labor is otherwise fully utilized (Not exactly oour situation today.).

The article then discusses measurement of the effects of government spending. The first reference, from the Quarterly Journal of Economics, is interestingbecause it is an article that basically argues that large disparities of income in an otherwise advanced democracy, or exclusion of large parts of a population from productive resources is generally associated with slow growth. The solution, of course, is to avoid such large distributional discrepancies, a point that seems to have been missed by The Heritage Foundation.

The next reference is a Republican staff report, not research. The next reference from the Dallas Fed states that tax increases to reduce deficits have a contractionary effect -- Duh...that's the whole idea of running a surplus when the economy is in a boom. It helps to avoid bubbles and is a lot less painful than what we face now.

Again, the EC and IMF references are basically studies that say don't run big deficits when the economy is growing or you'll mess it up. Would that we had followed that advice over the last six years. I haven't been able to review the Guseh article but it covered five years of data and apparently said that small governments slow growth and medium sized governments stimulate growth. Most of the "telling" citations are actually theoretical pieces not backed by empirical research. The quantitative studies that are included in the citations are all based on cross country analyses that, in large part, are comparing the growth rates of former Soviet states and developing countries with the growth rates of the US, Japan, European countries, etc. The range of variability in the data are limited and the conclusions are not very dramatic.

On balance, my own reading of this article is that it lacks substance and is more interested in promoting a political message than in analyzing the limited data available.

[tpaschal30]

Christ, how about a summary.....I can't read all of that

My first is the jest. The rest is reference for the first.

[Steve]

Another short summary.

Private spending in a free market - money will go to the most efficient producer and be spent on things that people actually want.

Government spending - money will go to the poltically connected based on what some beaurcat deems is important.

Simple as it gets.

[tpaschal30]

As Chart 1 illustrates, government spending con*sumes almost half of Europe’s economic output—a full one-third higher than the burden of govern*ment in the U.S. Not surprisingly, a large govern*ment sector is associated with a higher tax burden and more government debt. Bigger government is also associated with sub-par economic perfor*mance. Among the more startling comparisons:

* Per capita economic output in the U.S. in 2003 was $37,600—more than 40 percent higher than the $26,600 average for EU–15 nations.[3]
* Real economic growth in the U.S. over the past 10 years (3.2 percent average annual growth) has been more than 50 percent faster than EU–15 growth during the same period (2.1 percent).[4]
* The U.S. unemployment rate is significantly lower than the EU–15 unemployment rate, and there is a stunning gap in the percentage of unemployed who have been without a job for more than 12 months—11.8 percent in the U.S. versus 41.9 percent in EU–15 nations.[5]
* Living standards in the EU are equivalent to living standards in the poorest American states—roughly equal to Arkansas and Mon*tana and only slightly ahead of West Virginia and Mississippi, the two poorest states.[6]

Blaming excessive spending for all of Europe’s economic problems would be wrong. Many other policy variables affect economic performance. For instance, over-regulated labor markets probably contribute to the high unemployment rates in Europe. Anemic growth rates may be a conse*quence of high tax rates rather than government spending. Yet, even with these caveats, there is a correlation between bigger government and diminished economic performance.

[YardleyLabs]

Actually, if you adjust the US figures to include health care expenses provided through non-consumer paid health insurance, the total burdens are virtually identical. In terms of the growth rate argument, however, there is still no legitimate documentation of the relationship between growth and government burden. The European numbers include, I believe, much of the eastern european economies which are not really comparable to our own or to those of the western european countries in terms of either public expenditure levels or or growth levels. Remove those and adjust for health care and I suspect you will find most differences disappear with the possibility that the US is actually higher because of its large defense outlays.