Does Increased Government Spending Increase National Economic Health?

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Is it true as liberals claim that increased government spending improves the national economy?  There has been over four years of very significant increases in government spending since the collapse of the real estate bubble in 2008.  If this increase in spending has increased the economy over this period it should be indicated by some measure of the economy.  GDP, generally taken as an indicator of the economic health of a country, is defined as the sum of all consumer spending + all government spending + business spending on capital + the sum of exports minus imports. Since GDP includes government spending it would seem obvious that large increases in government spending would increase GDP.  But when looking at the last four years even with massive increases in government spending one sees a surprising result.

Government spending has INCREASED an average of $661B per year from 2008 to 2011 compared to spending in 2007. A total increase of $2.6T for the four years compared to continuing the 2007 level for four years . But GDP only increased by $1.2T over the same period meaning the sum of the contributions to GDP other than government spending DECREASED by $1.4T. That is consumer spending + business spending on capital + the difference between exports and imports decreased indicating a weakening economy and not an improving economy over that time period as proponents of increasing government spending would suggest.  2012 numbers are not yet available but estimates do not show a significant rise in GDP.

Perhaps liberals will argue that GDP is not a good measure of economic strength over this period for some reason so let’s look at government revenue collected from all taxes and fees because any change indicates a change in the economy if taxation rates are consistent over the period of interest.  2011 numbers are excluded because the social security tax break was present that year although if included the conclusions would not be changed.

In 2007 US total federal government tax revenue was $2.4T and in 2010 it was $1.9T in inflation adjusted dollars. Every year since 2007 the tax revenues have been less than that collected in 2007 and were essentially constant at $1.9T. In other words total government receipts are down because taxable items like income and profits are down indicating the large increase in government spending which began in 2008 has not improved the economy.

We know government borrowing and spending increases did not improve the economy so we ask why not and where did all the borrowed money go?

The difference in the deficit, that is the difference in the money borrowed, in 2008 and in 2011 was $841B. This number represents the increase in spending plus the loss in revenue between the two years. Note this is the difference in the borrowing not the total amount of borrowing for each year which was about $500B in 2008 and $1.34T in 2011.

If we compare government expenditures in 2008 to that in 2011 we can see where the additional borrowed money was spent. Pensions including social security and disability were up $116B, health care up $187B, defense up $149B, and welfare up $150B, all other categories changed only slightly. These four categories amount to $602B of the total difference in the spending increase of $621B.

We can see why all that borrowing and spending is not increasing revenue or improving the economy. All of the four categories, pensions, health care, defense, and welfare are lightly taxed. Further the liberal argument is therefore proven false that the economy is improved by putting money in the hands of the public through increased welfare, increased disability, increased unemployment payments, and all other forms of government give aways.

 So we can conclude from federal supplied numbers that:

  • Government revenues from taxes will not increase by giving  money to people who don’t pay taxes.

  • Government welfare and benefits to the unemployed does not produce national economic improvement.

  • GDP increases less than government spending increases indicate decreased economic activity from 2008 to the present, and

  • Liberal arguments are proven false that increased government spending improves the national economy.