Public spending: A societal boon or bust?
The ideological divide over the benefit of government spending has been pronounced since President Obama unveiled the American Jobs Act. The Obama administration believes that a federal investment is needed to spur job growth; fund critical needs in areas such as education, infrastructure and job training; and address the economy’s negative impact on low-income and middle-class families.
Meanwhile, House Speaker John Boehner’s position is that: “Government’s out-of-control spending has created a massive debt crisis that poses a direct threat to our country’s ability to create jobs and prosper.” And Senate Minority Leader Mitch McConnell describes Obama’s plan as “the same wasteful spending, the same burdensome union giveaways, and the same temporary tax policy that has failed the American people the last two years.”
Congressional Republican leaders (and some Democrats) firmly believe that public spending, which requires tax revenue, is the chief problem with the U.S. economy. But there is an opposite narrative, one based on empirical evidence, that suggests that public spending results in economic growth. (See Chart 1.) It’s a narrative that was driven home earlier this year during an Albert Shanker Institute forum on public services and public employee unions that featured top economists, attorneys and public opinion researchers.
“There’s a consistent presentation of public services, public spending and public service work as parasitic on the real productive sectors of the economy,” said David Hall, a researcher with the Public Services International Research Unit at the University of Greenwich Business School in London, speaking at the Shanker Institute forum. Several years ago, PSIRU launched a massive investigation, examining more than 140 years of global economic data to determine:
- The relationship between public spending and economic growth;
- How infrastructure development, education and health relate to economic growth and to efficiency of economies;
- The impact of public spending and public services on equality; and
- The role of public spending in the global economic crisis.
“There is nothing in the empirical evidence that suggests that public spending is a burden on growth or should be regarded as impeding growth,” said Hall, author of “Why We Need Public Spending,” the report detailing PSIRU’s findings.
The 77-page report’s findings, which are illustrated by charts and graphs, include:
- Public spending as a percent of gross domestic product in 2009 in the United States was 42 percent, compared with 44 percent in Canada, 56 percent in France, 48 percent in Germany and 51 percent in the United Kingdom. (See Chart 2.)
- Tax revenue as a percent of GDP in 2009 in the United States was 31 percent, compared with 39 percent in Canada, 49 percent in France, 45 percent in Germany and 40 percent in the United Kingdom. (See Chart 2.)
- Fifty percent of all productivity gains in the whole U.S. economy between 1930, when public spending was just over 10 percent of GDP, and 1980, when public spending was approaching 35 percent of GDP, were due to infrastructure investment, principally in roads. Other factors in the growth of public spending that cause and contribute to economic growth include productivity gains from public health and public education. (See Chart 3.)
- The share of all income taken by the top 1 percent of people more than doubled from 8 percent in 1980 to 17 percent in 2005.
- Income inequality within a country contributes to health and social problems—and the United States is the most unequal compared with 20 countries, including many European Union members and Japan. For example, life expectancy in the United States in 2006 was 78.1 years—lower than countries with similar wealth, as well as lower than developing countries like Cuba and Costa Rica. (See Chart 4.)
- Health expenditures in the United States are 16 percent to 20 percent of GDP, approximately $7,290 per capita in 2007—nearly double the per capita costs of public healthcare systems in Canada, France and Germany; and more than double the per capita costs in Japan and the United Kingdom. (See Chart 5.)
“For the past 150 years, public spending has been driving economic growth and development, and rising steadily in all countries of the world,” Hall said. “Far from being a burden on economies, it is an essential driving force, providing universal services for human development—healthcare, education, social security—and also the essential infrastructure making other economic activity possible, such as water, electricity, roads. If there is to be future growth and development, we should expect public spending to continue to grow, not to be cut back.” (See Chart 6.)
In his remarks at the Shanker Institute forum, Hall noted that pressures to reduce public spending are a global phenomenon. Prior to the global recession, the International Monetary Fund was already putting consistent pressure on countries to reduce public spending by 8.7 percent of GDP by 2030, he noted, taking the view that aging populations meant there was going to be too much public spending on pension and healthcare. “Forty-percent of the cuts [the IMF is pressuring countries to deliver] are coming from direct hits on government employees,” specifically through wage and benefit freezes and reductions and workforce cuts.
In the final analysis, Hall’s position on the value of public investments and government spending mirrors closely that of the Obama administration. There’s “powerful evidence about the economic development benefits of public spending and public services,” Hall said, noting that despite widespread rhetoric, public spending did not cause the global recession. “It was connected with unsustainable banking practices, personal borrowing practices, corporate borrowing practices, arguably inequality, but not at all with government borrowing and spending, nor with the wages of public employees, nor with the numbers of public employees.”
“Why We Need Public Spending,” as well as additional charts, are available at http://www.psiru.org/reports/2010-10-QPS-pubspend.pdf.
There are three interesting points about this graph. First, the two spikes are related to the spending on the two world wars. Second, the New Deal virtually doubled public spending, which was just over 10 percent of GDP going into 1930. Third, public spending declined in the 1990s, but the economic crisis forced up spending, putting public spending in the United States back on the long-term trend line.