Tuesday, January 12, 2010

More On Government Spending & Growth

In my post on government spending in America, I only discussed federal spending. It could be noted that state & local spending has followed a similar pattern-at least during the 2000s.

Between 1980 and 2000, direct state & local government spending was exactly unchanged at 11.6% of GDP. In the third quarter of 2009, that number had risen to 12.6%, further re-enforcing the overall picture of a record large American welfare state.

One objection to my argument might have been that the reason why government spending increased relative to GDP was that GDP slowed down for other reasons, not that government spending increased faster. While there is a limted degree of truth in that argument, it is only a very limited degree as it overlooks first of all how slower GDP growth should lead to slower growth of government spending, since this makes it cheaper for the government to lure away workers from the private sector. Slower GDP growth may not "naturally" slow government spending fully as much as GDP itself (leading to a higher burden of government), but it will reduce the absolute level of growth.

And secondly, while the absolute level of growth of state & local government spending was slightly lower in absolute terms (they can't print & borrow like the federal government so slower economic growth limits their ability to spend in a way which is not applicable for the federal government) growth of federal spending was in fact faster in the 2000s than in the 1980s and 1990s.

Real federal spending (excluding interest payments) increased by 2.1% per year between 1980 and 2000. If you also exclude military spending the average annual growth rate was 2.5%. By contrast real federal spending excluding interest payments increased 4.5% per year between 2000 and 2009. If you also exclude military spending, the average annual growth rate was 4.1%.

And finally, I should also mention that in an analysis of European economies the same negative relationship between the change in the burden of government and growth.