NCPA - National Center for Policy Analysis

Jec Study: Government Spending And Economic Growth (Summary) (Text)

April 24, 1998

The size of government in the United States is well above the level that would maximize economic growth, say economists James Gwartney, Robert Lawson and Randall Holcombe. In a new study from Congress' Joint Economic Committee they point out that the current economic expansion is proceeding at less than half the rate posted during the 1960s.

  • Per capita government spending stood at over $9,000 in 1996 -- more than 10 times higher than it was in 1960.
  • While per capita spending growth has slowed in recent decades, it still increased 26 percent between 1990 and 1996.
  • Had government spending stayed at its 1960 level, the rate of economic growth would have been faster -- producing a $9.16 trillion economy in 1996, rather than the $7.64 trillion economy actually recorded.
  • The average income for a family of four would have been $23,440 higher, the authors estimate.

Assuming that money is first spent on basic government functions that promote economic growth -- such as a judiciary and law enforcement -- and later expenditures are made on items that depress growth such as transfer payments, researchers say that above a certain level government spending is inversely related to the level of economic growth.

They studied the size of government in 23 wealthy counties as a percentage of GDP and how they spent public funds. They conclude that for every 10 percentage points that government outlays increase, real GDP growth is trimmed by 1 percentage point.

Sources: James Gwartney (Florida State University), Robert Lawson (Capital University in Columbus, Ohio) and Randall Holcombe (Florida State University), "The Size and Functions of Government And Economic Growth," April 1998, Joint Economic Committee, Washington, D.C., and Perspective, "Spend More or Grow More?" Investor's Business Daily, April 24, 1998.


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