NCPA - National Center for Policy Analysis

Federal Spending Slows Growth

March 1, 1996

The economic drag of excessive federal government spending over more than 20 years has cost the average worker the equivalent of $106,800, according to a recent study for the Joint Economic Committee of Congress.

Researchers examined the relationship between federal spending and the rate of growth in productivity and labor compensation since 1947. They conclude that:

  • When federal spending as a share of gross domestic product (GDP) exceeded a level of 17.4 percent, additional federal spending caused the growth of productivity and compensation to slow down.
  • Those added dollars would have been more productive if they had been spent by the private sector, and thus would have increased the rate of growth.
  • However, during the period 1973 to 1994, federal revenues averaged 18.7 percent of GDP, and federal spending reached 22.0 percent in 1994.
  • Thus at present levels of federal spending as a share of GDP, restraining federal spending by one dollar during the current year would yield an increase of 26 cents in wages and benefits.
  • If the dollar savings were maintained over a seven-year period, they would produce cumulative gains of $1.68 in wages and benefits.

And, if federal spending had held constant at its 1965 level of 17.6 percent of GDP, and taxes were adjusted accordingly, the present value of the gains to the typical worker over the period 1973 to 1994 would amount to $106,800 -- enough to purchase a median priced new home.

Source: Lowell Gallaway and Richard Vedder, "The Impact of the Welfare State on Workers," March 1996, Joint Economic Committee of Congress, Washington, D.C.


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