The first study we'll look at shows a clear inverse correlation between the size of government and growth. This really confirms common sense, as government only takes from private production to fund its spending. And while one can make a case that some government spending is productive, much of government spending, including transfer payments, does not contribute to that case. That is not the same as arguing that those transfer payments should not be made. It simply points out that there is a cost to society to increase the size of government. And that cost is in jobs, hence the ugly employment numbers.
Bergh and Henrekson find a 'significant negative correlation.' Specifically, 'an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate.'" (bold emphasis is Mauldin's)
Mauldin also quotes a paper by Reinhart and Rogoff:
"Consistent with other more recent research, the authors confirm that public debt overhang episodes are associated with growth over one percent lower than during other periods. ... duration of the average debt overhang episode across all 26 episodes lasted an average of 23 years.... Growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interst rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.We see where this is going. John is in favor of government austerity based on the correlation between higher government debt and lower economic growth. He has confused cause and effect, in my opinion. Low growth (or negative growth) causes high unemployment, which in turn causes lower tax revenues and higher spending on unemployment insurance, government-provided medical care, and even disability insurance.
This is exactly opposite from John's claim that bigger government causes lower growth. This makes no sense to me, but it's the classic supply-side Republican argument. In this view, government spending "crowds out" private investment, channeling resources into non-productive government pursuits. Unfortunately, the current economic malaise represents a demand problem, not a supply problem. Government is not crowding out private spending; there is literally trillions of dollars sitting in corporate coffers and private accounts looking for a productive place to invest money. Unfortunately, at the end of the pipe, the consumer is tapped out worldwide, and has no money to spend!
They call economics the "dismal science" because it's not really science at all. The world is not a laboratory, and we seldom have the luxury of testing two possible solutions to the same problem, to see which works better. In this sense, we have been extraordinarily lucky; lower government spending ("austerity programs") have been tried in a number of countries (such as the U.K. and Greece). The short-term results have been unanimously bad: lower government spending leads to lower GDP (duh!). Long-term, it may lead to higher GDP, but there's no evidence of that.
On the other hand, spending programs (like the 2009 U.S. stimulus) have shown good short-term results, though there's no evidence of long-term benefits (unless the money is spent on long-term projects, like roads and bridges).
John Mauldin is generally a balanced, thoughtful commentator whom I generally agree with. But he really blew it on this one!
Tweet
