Public spending lowers economic growth

Another article for all you Keynesians out there: More Government Spending = Weaker Economic Performance. And the article comes with many other charts and notes this as well:

  • The OECD admitted in one study that “a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries.”
  • The OECD admitted in another study that “a cut in the tax-to-GDP ratio by 10 percentage points of GDP (accompanied by a deficit-neutral cut in transfers) may increase annual growth by ½ to 1 percentage points.”
  • The OECD admitted in a different study that “an increase of about one percentage point in the tax pressure (or, equivalently one half of a percentage point in government consumption, taken as a proxy for government size)…could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent.”

Why this might be you will never understand if you start from Y=C+I+G, but that’s all you are going to find in any macro text anywhere in the world.

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17 Responses to Public spending lowers economic growth

  1. Malcolm Thomas

    You are wrong as usual, Steve. Y=C+I+G in no way precludes the view that greater government reduces economic performance. All that is needed is recognition that, for example, I is affected by G.

  2. Rohan

    Malcolm Thomas
    #2684932, posted on April 12, 2018 at 1:07 pm
    You are wrong as usual, Steve. Y=C+I+G in no way precludes the view that greater government reduces economic performance. All that is needed is recognition that, for example, I is affected by G.

    As an engineer, I’m no economic expert. But I’m responsible for value adding within the company I work for. Please explain how the government value adds overall?

    And from my understanding (and correct me if I’m wrong), there lies the answer to why increasing G decreases economic activity overall. Even government bodies configured to operate like a business, hence are supposed to value add, don’t.

    Exhibit A: the NBN.

  3. Malcolm Thomas

    Hi Rohan,
    Read my comment again (carefully) and you’ll see that I was not arguing that government spending boosts evening performance. Rather, I was just pointing out one of Steve’s myriad misrepresentations of mainstream economic views.

  4. closeapproximation

    All that is needed is recognition that, for example, I is affected by G

    LOL! Well that fixes it then! Fucking GENIUS.

    How about:

    Y(Y,C,I,G,OtherShit) = C(Y,C,I,G,OtherShit) + I(Y, C,I,G,OtherShit) + G(Y, C,I,G,OtherShit)

    Now we’re all good!

  5. closeapproximation

    I was not arguing that government spending boosts evening performance

    So you mean we’re not getting nationalised Viagra ?? Damn it!

  6. ACTOldFart

    I love this sort of graph and the multitude of interpretations it brings forth. It makes entrail reading seem like an absolute cake walk by comparison.

    Presumably the logic is: Less Gov’t spending -> Less Gov’t taxation -> More money for industry to invest and consumers to spend -> Greater growth. If that’s the case, shouldn’t the graph use Gov’t Tax Take rather than Gov’t Expenditure as the X axis?

    Also there seems to be a hell of a lot more points on that graph than there are OECD member countries (34). Are some countries contributing multiple points, each for a different year? If so, which countries and why? It could be wide open to all sorts of distortions including cherry picking, especially when the OECD includes economies as diverse as the USA, Turkey and Estonia.

    Surely there are also lags between Government tax take now, and the fruits of investement (ie more growth), which will not appear for some years’ time, especially if the investment is in innovation with its essential trial and error nature. Doing the exercise plotting (Growth in year A + x) vs (Tax take in year A), with different values of x for each plot, might revela some very different results – and hopefully a R^2 better than 0.39, which is respectable but not brilliant.

  7. Malcolm Thomas

    No genius required- just not the blatant idiocy/misrepresentation that Kates consistently sprouts.

  8. H B Bear

    Same old Malcolm or a new one?

    I would encourage all Cat commenters named Malcolm to adopt a pseudonym such as Fat Cat, Percy Penguin even Borobi to avoid being lumped in the the various Malcolms here. And please don’t join the Lieboral Party either for that matter.

  9. notafan

    Deputy Commandant of the Main Operations Directorate of the Russian General Staff Viktor Poznihir blamed anti-government militants of fabricating the chemical attack in Syria’s Douma, speaking in Moscow on Wednesday.

    “On April 7, the last attempt was probably made to fabricate false evidence of the alleged use of toxic substances by the Syrian authorities in Eastern Ghouta. The odious ‘White helmets’ acting exclusively in the ranks of terrorists, once again, imitating in front of the video cameras, staged a ‘chemical attack’ on civilians of the city of Douma,” he said.

    Russian military police deploying all over Douma

  10. struth

    Where the polemic variation in constructed algorithms seems to deconstruct reform variation into theoretically observable principles, for the use of reciprocated recommendation, it happens that substantial mathematical results equivalent to transferrable coexistence of formulated referrable characters means the whole process can be analysed endlessly by partisan political academia with the goal of self promotion , on the basis that no one is willing to submit to the overt pomposity and subjugation of excitement into the realms of crushing boredom, actively pursued by those very academics in what is nothing more than intellectual genital measuring exercise, and to apply visually impairing molecules produced by , in many cases pyromaniacs and to hide their lack of use to one’s society by reflection enhancement experts.

  11. Bruce of Newcastle

    you will never understand if you start from Y=C+I+G

    This is an excellent example why GDP should only be Y=C+I+(X−M).

    Pollies love to increase government expenditure to increase GDP because of the G in the C+I+G. Unfortunately the act of doing so strangles the rest of the economy so GDP is worse than if they hadn’t done so. And they are quite happy to borrow to raise G, which is really stupid.

    The graph though does say one thing: parasites are never good for the organism.

  12. struth

    GDP is a bullshit way to measure how an economy is travelling because government manipulates it as if their expenditure came from nowhere.

  13. Tel

    What is IR90?

    Ireland 1990, tech boom.

  14. Tel

    GR10 = Greece 2010, ran out of other people’s money.

  15. 2dogs

    Malcolm, I think you misunderstand the argument over Y = C + I + G. It is accepted as something true by definition, but that definition is largely meaningless: all it is is a classification system for transactions. While the transactions are “real”, the classifications themselves are not, and the objection is to the way that Keynesianism reifies those classifications.

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