NCPA - National Center for Policy Analysis

Investment Fuels Growth, Not Government Spending

February 14, 1998

Since New Deal days, the theory in some economic quarters has been that economic growth depends on government stimulus. But private investment has paid a bigger role in the current economic boom than in any other post-World War II expansion, while government spending has played a smaller part.

  • The latest Economic Report of the President shows that private fixed investment -- in factories, business equipment and houses -- has contributed over 30 percent of the growth in gross domestic product (GDP) since 1991.
  • Government spending, however, accounted for only 1.7 percent of growth.
  • By contrast, public spending during the 1980s expansion contributed about 16 percent of GDP growth -- slightly more than private fixed investment.

One result of this surge in private investment has been a huge growth in the capacity of American firms. For the past three years, average annual growth in capacity has been higher than at any time since 1968.

Source: "Private Propulsion," Economist, February 14, 1998.

 

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