Research Points In Support of Limited Government Spending & Growth

Below are a variety of informational bullet points from demonstrated sources that reinforce the argument that higher levels of government spending and growth do have negative impacts on the private sector and overall economy.  These are taken from non-partisan notable studies, publications, and even some (quasi-)government agency reports.  They offer an alternative view and research to dispute the often overblown myths of Keynesian-based benefits. (In some instances, the information may come from older studies; however, it is founded on historical statistics and proven principles that still apply regardless of the date of the study or publication.)

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of these bullet points.

“Government spending reduces productivity as resources are withdrawn from the private sector and placed in the unproductive public sector.”

— U.S. Congress Joint Economic Committee, “Government Spending and Economic Growth” report, 1995

“The financing of any level of public expenditure, whether through taxation or borrowing, involves the absorption of real resources by the public sector that otherwise would be available to the private sector.”

— International Monetary Fund Staff Papers, “Fiscal Policy and Long-Run Growth,” 1997

“Growth in government stunts general economic growth. Regardless of how it is financed, an increase in government spending leads to slower economic growth.”

Federal Reserve Bank of Dallas, 2003

“There will be a strong demand for redistribution in societies where a large section of the population does not have access to the productive resources of the economy. Such conflict over distribution will generally harm growth.”

— The Quarterly Journal of Economics, “Distributive Politics and Economic Growth,” 1994

“An industrial country with a serious deficit problem should pursue a strict fiscal consolidation strategy, focused on expenditure cuts.”

— International Monetary Fund Staff Papers, “An Empirical Analysis of Fiscal Adjustments,” 1996

“The state nowadays is oversized in many western countries. Having less state, the economic growth could be accelerated.”

Blankart, Institute for German Economics, 2004

On the impact of government size on worker output: “Potentially productive individuals spend their efforts influencing the government. At high levels, they lobby legislatures and agencies to provide benefits to their clients. At lower levels, they spend time and resources seeking government employment.”

— Stanford University and National Bureau of Economic Research, Jones & Hall, “Fundamental Determinants of Output per Worker Across Countries”, 1997

“The optimal government size is 23 percent (+/– 2 percent) for the average country. This number, however, masks important differences across regions: estimated optimal sizes range from 14 percent (+/– 4 percent) for the average Organization for Economic Cooperation and Development (OECD) country to…16 percent (+/– 6 percent) in North America.”

“The Optimal Government Size: Further International Evidence on the Productivity of Government Services,” Economic Inquiry, 1996

“This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government expenditures represent about 20% of GDP.”

Public Choice, “Productivity in the United States,” data from 1929-1986

“The marginal productivity of government services is negatively related to government size; the public sector is more productive when small.”

Economic Inquiry, “The Optimal Government Size,” 2007

Even the Congressional Budget Office acknowledged the following points:

  • Many federal investment projects yield net economic benefits that are small, or even negative. Others yield high returns that would be forgone in the absence of federal involvement, but the number of such projects appears to be limited, and hence their potential impact on growth is small. Increases in federal investment spending that are not targeted toward cost-beneficial projects can reduce growth.
  • Federal investment spending can displace investments by state and local governments and the private sector. Displacement is likely to be substantial in some cases, such as roads and bridges, which state and local governments have a strong incentive to fund because the benefits accrue primarily to local users. Federal spending that displaces other investment is unlikely to have a positive effect on growth.
  • Many federal investments are motivated primarily by noneconomic policy goals (such as equality of opportunity, national security, and the advance of scientific knowledge). Others are influenced by political considerations. For those reasons, one cannot expect that federal funds will always be directed toward the most cost-beneficial use, even within those classes of projects that have an economic rationale.

— Congressional Budget Office, “The Economic Effects of Federal Spending on Infrastructure and Other Investments“, 1998

Take Note of Wagner’s Law, Heed the Warning:
Wagner’s law is named after the German economist Adolph Wagner (1835-1917).  It says that the development of an industrial economy will be accompanied by an increased share of public expenditure in gross national product.  Wagner’s Law indicates that a welfare state evolves from free market capitalism due to the population voting themselves ever-increasing social services. Neo-Keynesians and socialists often urge governments to emulate modern welfare states like Sweden.

The Heritage Foundation also published a very thorough study in 2005 titled “The Impact of Government Spending on Economic Growth“, written by Daniel J. Mitchell, Ph.D..  It covers a wide variety of issues and information related to the negative effects of government spending on the economy, and utilizes a vast number of  resources, including some of those listed above, to support the findings.

Download a PDF
of these bullet points.


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Filed under Budget, Economy, Entitlements, Government Size, spending, stimulus, The 912 Project

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