Why do so many Americans believe that big government is injurious to economic growth? A close examination of economic data from wealthy nations shows there is no relationship between the size of government or the degree of taxation and the level or rate of growth of national income and gross domestic product. Yet the myth that welfare states hinder growth persists.
This is largely due to decades of widespread, unwarranted claims based on research that exaggerates the costs of social safety nets. They are the result not of any new facts but of dubious research assumptions and techniques, and in some cases, outright deception.
What follows is a summary of five misleading tactics used by conservative researchers, fostering current myths about the relationship between government and economic growth.
1. Theoretical models instead of facts. A disturbing tendency in economics has been to present a purely theoretical exercise as if it uncovered new facts about the world. This trend is quite evident in the anti-government studies emanating from the right. For example, two models cited by Nobel Prize winner Robert Lucas claimed to “show” that eliminating capital income taxes would make Americans 15 percent better off in terms of consumption, and that France would be 20 percent richer if it adopted lower US capital gains rates.
But these models are not based on real-world data. The anti-government advocates who use them simply take for granted that no economic good can come from government’s spending its people’s tax money. Or that government spending is always pure economic waste. A softer variation on the tactic assumes that tax revenues are handed back to the population in lump-sum payments and therefore neutral in terms of social benefits. These models ignore the solid evidence showing that government spending on education and healthcare, for example, promotes economic growth. They also gloss over the social and economic benefits of taxing pollution or alcohol and cigarette addiction.
Data compiled over many years for my book Growing Public consistently show that higher taxes and robust social spending are not a drag on overall growth in the real world. While the availability of unemployment compensation may reduce work and output somewhat, this loss is offset by the positive effects on productivity of government support to social goods like early education, maternal leave and health insurance.
2. Guilt by definition. A current example of this ploy is the Economic Freedom Index (EFI) funded by the Fraser Institute and other free-enterprise lobbying groups. This index supposedly compares the degree of economic freedom in a variety of nations. But the EFI automatically assigns a lower freedom score as the size of government increases. Thus, any welfare state’s safety net programs are assumed to reduce economic freedom, despite the obviously greater freedom enjoyed by recipients of government aid in education, healthcare and so on. The EFI simply assumes without evidence that any increase in government spending undermines economic freedom for the nation as a whole.