Thursday, May 2, 2013

When the government spends money, the private sector suffers

Chris Edwards of the Cato Institute had an interesting post yesterday in which he examined what happens to the private sector economy when the government increases spending.  He analyzed data going back over fifty years and his results indicated that,
For example, if real government spending growth was zero, private GDP would be expected to grow at 4.2 percent. If real government spending growth was 5 percent, private GDP growth would be expected to fall to 2.8 percent.
This is not news to economists who are not supporters of the Keynesian worldview; many studies have shown that growth in government damages the overall economy including, of course, the private sector.  But his article is written for the layperson and, consequently, very accessible and interesting.  I also particularly liked his conclusion:
Personally, I’m suspicious of statistical “proofs” of economic relationships. But I do think that even broad-brush results such as this should give pause to the reporters and policy wonks who often write articles with hidden Keynesian assumptions. I think that the harm from increasing government spending affects the economy over a longer period of time. But even these single-year regression results suggest that people should be skeptical of the widely held notion that the economy is like a car and the government can speed things up by simply stepping down on the spending gas peddle.
You can read the whole article here.