I’ve repeatedly explained that Keynesian economics doesn’t work because any money the government spends must first be diverted from the productive sector of the economy, which means either higher taxes or more red ink.
So unless one actually thinks that politicians spend money with high levels of effectiveness and efficiency, this certainly suggests that growth will be stronger when the burden of government spending is modest (and if spending is concentrated on “public goods,” which do have a positive “rate of return” for the economy).
I’ve also complained (to the point of being a nuisance!) that there are too many government bureaucrats and they cost too much.
But I never would have thought that there were people at the IMF who would be publicly willing to express the same beliefs. Yet that’s exactly what two economists found in a new study.
Here are some key passages from the abstract.
We quantify the extent to which public-sector employment crowds out private-sector employment using specially assembled datasets for a large cross-section of developing and advanced countries… Regressions of either private-sector employment rates or unemployment rates on two measures of public-sector employment point to full crowding out. This means that high rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates.
So even an international bureaucracy now acknowledges that bureaucrats “incur substantial fiscal costs” and “have a large negative impact on private employment.”
Well knock me over with a feather.
Next thing you know, one of these bureaucracies will tell us that government spending, in general, undermines prosperity. Hold on, the European Central Bank and World Bank already have produced such research. And the Organization for Economic Cooperation and Development has even explained how welfare spending hurts growth by reducing work incentives.
To be sure, these are the results of research by staff economists, which the political appointees at these bureaucracies routinely ignore.
Nonetheless, it’s good to know that there’s powerful evidence for smaller government, just in case we ever find some politicians who actually want to do the right thing.
[…] misguided, but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional […]
[…] misguided, but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional […]
[…] but it’s perversely impressive to observe his relentless advocacy for higher taxes, bigger government, more intervention, and limits on constitutional […]
[…] both unnecessary and counterproductive in the medium and long term. There seems to be widespread agreement – among academics and economists at the IMF, European Central Bank, World Bank and […]
[…] is both unnecessary and counterproductive in the medium and long term. There seems to be widespread agreement — among academics and economists at the IMF, European Central Bank, World Bank and […]
[…] both unnecessary and counterproductive in the medium and long term. There seems to be widespread agreement – among academics and economists at the IMF, European Central Bank, World Bank and […]
It seems reasonable to create prosperity by lowering micro-economic incentives to produce at the personal level (healthcare services you don’t have to pay for etc. as in Krugman’s Medicare for all and other redistributionist social proposals) but then somehow multiply this lack of raw and intrinsic productivity into a dynamic prosperous economy. An economy where individual incentives to produce, and individual production are lower, but somehow, superior goods, services, and standard of living magically appear out of Zeus’ head (or Krugman’s macroeconomic magic in this case). There is always hope that somewhere there is a free lunch machine. That, and the inherent voter desire to redistribution, are the wellsprings of mandatory collectivism, the big government it requires, and decline.
Hello Dan, could you explain to me how Krugman is wrong about his assertion that crowding out is not a factor while the economy is underperforming….low employment, low use of capital, Fed rates at zero…he calls this a liquidity trap. I find his argument convincing. Have you considered this or have you just dismissed it.
I teach the crowding out factors to my economics classes at a private university – essentially night school to working adults. Also, the effects of loose monetary policies.
It’s amazing to me how ill-informed students are prior to taking my class. Most likely due to the political posturing that is promoted in the popular press. The good news is I turn about three-fourths of every class toward better understanding of economic principles and a healthy skepticism about what they hear on the airwaves.
Keep up the good work Dan.