Prometheus 6

Thanks a lot, Oliver.

Does Big Government Hurt Economic Growth?
By JEFF MADRICK

IN widely reported comments before a Congressional committee in February, Alan Greenspan, the Federal Reserve chairman, suggested that President Bush's tax cuts should not be even partly rescinded. Rather, Mr. Greenspan said, the nation should cut future domestic spending, including Social Security benefits, to balance the budget. Higher spending or higher taxes would deter economic growth, he warned.

The committee should have asked the statistically oriented chairman for the evidence. A comprehensive analysis by the economic historian Peter H. Lindert, published in a new book, "Growing Public" (Cambridge University Press), contends that there simply is none. His analysis is partly a broad extension of other studies by economists like Joel B. Slemrod of the University of Michigan, but he adds considerably to the argument.

…As Mr. Lindert points out, estimates by some economists, like Martin Feldstein, a Harvard professor and president of the National Bureau of Economic Research, find that extra government spending leads to a large reduction in gross domestic product.

In fact, taken literally, these studies suggest that the gross domestic product of Sweden, to take an example of a nation with heavy social spending, should have been reduced by up to 50 percent. But nothing remotely like that has happened.

The principal problem with such studies, Mr. Lindert writes, is that they are simulations of a highly simplified world. The economists recreate an economy where almost all incentives lead to slower growth, Mr. Lindert said, but that world does not exist.