Friday, 29 June 2018

Economic myths: The impact of increasing government spending on economic growth

A sane person can tell the difference between government spending/activities which help the economy; which harm the economy; and which are just transfer payments (welfare, which in turn can either help, harm or be neutral). The avowedly non-partisan economics help gives some examples in each category and attempts to explain why.

As per usual, the lefties want more government spending/bigger government and claim that nonsense like the 'multiplier effect' will help grow the economy; and the right wingers (claim to) want lower government spending/smaller government and claim that this will help the economy.

Neither side distinguishes properly between good, bad and neutral government spending/activity, and both sides put forward their supposedly empirical studies showing whatever it is they want them to show.

What strikes me is that these studies, however scrupulously done, are missing the point - they are confusing cause and effect i.e. countries have generous welfare systems because they are wealthy; countries are not wealthy because they have generous welfare systems. With infrastructure, it is a a feedback thing, the government has to push through roads, sewage systems, national grid to get things kick-started, which then creates more wealth that can be spent on improving them.

So the overall tendency in democratic countries is for government spending to increase as a proportion of GDP when the economy grows. Whether you think this is a good thing or a bad thing is an entirely different topic, but I suppose it's just human nature. Voters want stuff and politicians love bribing them with their own money. The more surplus there is above the subsistence minimum, the more can be collected in tax without triggering a revolution.


Dinero said...

" Surplus above a minimum ..." sounds similar the the accounting of Ricardos law of rent.

Here's something to make you laugh.

Its not a cash mountain for TFL it a Liability for TFL. Unless they keep oyster cards payments in a fund.

Mark Wadsworth said...

Din, true. The passenger's unused prepayment (asset) is tfl's liability.

James Higham said...

"Voters want stuff and politicians love bribing them with their own money."

In one.

Dr Evil said...

I want reduced taxation. I want to keep my money and spend it how I wish rather than have it given to a Swiss bank in the name of an African/Asian dictator. It really is that simple. If anyone should piss my money up a wall it should be me, not some government lackey.

Mark Wadsworth said...

Dr E, yes, everybody says they want to pay less tax and identifies some items of public spending they disagree with*.

But politicians have worked out that people are so stupid, while they grumble about paying for everybody else's goodies, what decides their vote is which party offers each group the most goodies. If the pol's from one party threaten take those away the goodies from any group, that group then votes for the other party. So we all end up paying for each other's goodies while grumbling about them.

* My suspicion is that at least a fifth or maybe even a quarter of all government spending is waste and theft i.e. of no faintest benefit to anybody outside the public sector, and that includes the aid budget.

Dinero said...

It also tallies with government spending having a large sensitivity to fluctuations in GDP.