Now that Donald Trump has been elected, one of my main goals will be to convince him and his team that it would be wrong to leave government spending on autopilot (and it would be even worse to spend more money and increase the burden of government!).
But we have a very powerful weapon in this battle. It’s called evidence.
And now there’s even more data on our side. The Institute for Economic Affairs in London has just published an excellent new book on fiscal policy. Edited by Philip Booth, Taxation, Government Spending, & Economic Growth is must reading for those who want to understand the deleterious impact of the modern welfare state.
The IEA’s Director General, Mark Littlewood, explains the goal in the book’s foreword.
The most depressing part of the book is contained in Chapter 3. As you can see from Table 7, the burden of government used to be rather modest in western nations. Indeed, I’ve made the point that it was during the era of small government that the western world became rich.
But let’s not cry about unfortunate historical developments.
It will be more productive if we measure the harm so we can educate policy makers about the need for spending restraint.
And the book is filled with lots of useful information in that quest. In Chapter 4, David Smith explains the interaction between fiscal policy and economic performance, noting that excessive government not only reduces the level of economic output, but also the future growth rate.
He provides a micro-economic explanation for why various government activities hinder growth (I offer eight reasons in this video, by the way).
In other words, he’s saying that not only is government too big. He’s also pointing out that much of the spending is seemingly designed to impose economic damage by discouraging the productive use and allocation of labor and capital.
He then reviews some of the research on the “Rahn Curve.”
Incidentally, I like and dislike what he wrote in this section.
I like it because the obvious conclusion is that the burden of government is excessive in both the United States (37.9 percent of GDP according to OECD fiscal data) and the United Kingdom (43.3 percent of GDP). And we can use this data to argue for much-needed spending restraint.
But I don’t like the above passage because I think the growth-maximizing size of government is well below 20 percent of GDP. As I’ve previously explained, academic researchers are constrained by the lack of data for small-government economies. So when they crunch numbers (relying in all cases on post-WWII data, and in most cases on much more recent figures), they basically find that Hong Kong and Singapore grow the fastest and they think that implies the public sector should consume 20 percent of economic output.
But that implies, if you recall the data in Table 7 from above, that nations would have enjoyed more growth in 1870 if they doubled the burden of government spending. I think that’s nonsensical. What’s really happening is that researchers are simply measuring the downward-sloping portion of the Rahn Curve.
But just because Hong Kong and Singapore are the first two jurisdictions that can be plotted, that doesn’t mean the Rahn Curve peaks at that point.
But I realize I’m nit-picking, so let’s go back to the book.
In the following chapter, Professor Patrick Miniford shares some additional research on the link between government spending and economic performance. I especially like how he shares a very useful table looking at some scholarly findings on the relationship between the overall fiscal burden and national prosperity.
He also shares the conclusions from additional research.
And he discusses some new statistical findings, along with the potential implications for the United Kingdom.
I’m sure the data and conclusions also apply to the United States.
Which brings me back to where I started. I fretted yesterday that Trump’s election will be a challenge to advocates of economic liberty. Indeed, he explicitly called for more infrastructure spending and implicitly called for more VA spending in his acceptance speech. Combined with his apparent rejection of entitlement reform, this doesn’t instill much confidence.
But that’s all the more reason to disseminate this new research on the bad consequences of letting America become more like France.
Republished from Dan Mitchell's blog.
Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.
This article was originally published on FEE.org. Read the original article.
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