December 24, 2008
Government Spending and Economic Growth
By Wade Rousse
The following quote is from Gwartney, Stroup, Sobel, and MacPherson’s text book titled Macroeconomics Private &Public Choice:
“In summary, while government activities that focus on the areas where it has a comparative advantage will enhance growth, continued expansion will eventually exert a negative impact on the economy.”
The authors evaluate government spending for 23 OECD countries. They conclude that after a certain point a 10 percent increase in government spending, as a share of GDP, will result in annual economic growth being reduced by approximately one percent.
So the question becomes…at what point will economic growth be hindered? Congressional Budget Office (CBO) consultant Edgar Peden estimates that in the U.S. this will occur when government expenditures are greater than 20 percent of GDP. And Gerald Scully, a University of Texas at Dallas professor, estimates that annual economic growth will slow when government (combined federal, state, and local) spending reaches approximately 22.9 percent of GNP. These numeric thresholds are developed using different methodologies; however, they both indicate that too much government will slow economic growth.
I guess I’m just curious as to your thoughts?? Do you think that cutting government spending once the recession ends will be conducive to economic growth??
Posted by Wade at December 24, 2008 4:43 PM
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