Government consumption spending significantly reduces economic growth, according to a new research paper by Dr. Michael Connolly and PhD student Cheng Li of the University of Miami. (RELATED: Government Spending Doesn’t Create Jobs)
The study uses OECD data for 31 member countries from 1999 to 2011 to examine the relationship between three categories of government spending — public consumption spending, public investment and public social spending — and economic growth rates.
The authors pay particular attention to the role of government consumption spending on non-market goods, which include defense, police, fire and justice.
After applying their regression, they determined that for every percentage point increase relative to GDP in such “non-productive consumption spending,” the rate of real economic growth is reduced by 0.86 percent.
With regard to public investment, the authors find the relationship nearly reversed, with a one-percentage point increase raising the real growth rate by 0.82 percent.
The study also examines public social spending, concluding, “while increased public social spending and lower growth are associated, it is not possible to robustly conclude that social spending reduces growth.”
The ambiguity stems from the fact that periods of lower economic growth lead to higher levels of public social spending, due to increased reliance on programs like unemployment insurance and welfare.
In order to isolate government spending as a variable, they control for various other factors that might influence growth rates, including human capital, total investment spending and business cycles.
Connolly and Li refrain from deriving any firm policy prescriptions from their study, but do suggest that, “for a given level of public spending, more spending on investment goods and less spending on consumption goods should increase growth significantly.”
They also note that President Barack Obama’s stimulus package, the American Recovery and Reinvestment Act of 2009, consisted of slightly less than 5 percent investment projects, with the remaining 95 percent being spent on the kind of consumption they find harms economic growth. (RELATED: Top Ten: Government Spending at its Stupidest)
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