Monday, June 21, 2010

A Bigger Government Means a Less Prosperous Economy

A new study from the Mercatus Center at George Mason University examines some of the academic research about the relationship between government spending and economic performance. Reinforcing many of the points I made in my theory and evidence videos, the GMU study finds that big government undermines growth:

Although the studies are not all consistent, historical evidence suggests an undesirable, long-run effect from government spending: it crowds out private-sector spending and uses money in unproductive ways. ...Professor Emeritus of Law at George Mason University Gordon Tullock suggests that politicians and bureaucrats try to gain control of as much of the economy as possible.5 Moreover, demand for government resources by the private sector leads to misallocation of resources through “rent seeking”—the process by which industries and individuals lobby the government for money. Rather than spend money where it is most needed, legislators instead allocate money to favored groups. ...A 1974 paper by Stanford’s Gavin Wright found that political attempts to maximize votes explained between 59 and 80 percent of the difference in per capita federal spending to the states during the Great Depression. ...An NBER paper that analyzes a panel of OECD countries found that government spending also has a strong negative correlation with business investment. Conversely, when governments cut spending, there is a surge in private investment. ...Additionally, in a study of 76 countries, the University of Vienna’s Dennis C. Mueller and George Mason University’s Thomas Stratmann found a statistically significant negative correlation between government size and economic growth.

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