A new report finds that government spending actually diverts economic resources away from the private sector, causing it to contract, says R. David Ranson, a senior fellow with the National Center for Policy Analysis (NCPA).
In Government Spending Crowds the Private Sector Out and In, Ranson says that the average dollar of government spending wipes out more than a dollar of spending by businesses and individuals, and the economy suffers.
“The common assumption that government spending will boost the economy ignores the fact that the nation has finite economic resources,” said Ranson. “Increased government spending induces the private sector to contract, a phenomenon that has been called ‘crowding out.’ Surprisingly simple evidence shows that government growth tends to cut the business sector back.”
Ranson notes that, conversely, large reductions in federal spending also had a disproportionate effect on the private sector:
For the three years in which federal consumption spending fell by between 2 and 5 percentage points of GDP (the average reduction was 3.4 percent), private sector spending rose 4.2 percentage points during that and the following year.
For the two years in which federal consumption spending fell more than 5 percentage points of GDP, the average reduction was 17.9 percent; private sector spending rose 29.3 percentage points.
“Discriminating cuts in government spending release resources that the private sector could have put to work more productively. On the average, reduced government growth implies increased business growth and a brighter picture for the economy as a whole,” he said.
Source: R. David Ranson, “Government Spending Crowds the Private Sector Out and In,” National Center for Policy Analysis, June 26, 2013.