Government Spending and Growth

A recent post I made reviewed the work of a blogger who wanted to refute arguments in favor of free market capitalism. The blogger presented various "myths" that proponents of capitalism told in order to make their case.

One of these purported myths was that bigger government leads to slower economic growth. Today I conducted a brief online search for scholarly work on this subject. I ignored the studies put out by the Heritage Foundation and Mercatus Center as these could be dismissed for having a well known ideological bias in favor of capitalism. The first thing that came up in the search was a list of scholarly articles including the number of citations.

The most highly cited work gave a story that largely confirms the myth. Government spending should be divided into two different kinds. There is the kind that goes toward infrastructure and improving property rights, which was productive. Then there was the kind that was on consumption or transfer payments. The theory was that there would be no empirical relationship between productive government expenditure and growth, since each government would choose the optimum level of expenditure. However, unproductive spending would hamper growth.

The work gave a brief summary of empirical work on this subject, which included work that found no relationship and work that found a negative relationship. That is all of the work that was listed either found no relationship or found that government spending was correlated with slower economic growth. This is what the authors found once education and defense were removed. They also found support for the idea that governments come close to optimizing their expenditure on public investment.

I still have 24 "myths" to review and will have to get back to this later.  Thus far, I believe that the only objection that he has come up with that might conceivably be fatal to a libertarian argument is that comparing progress made from 1960-80 with that from 1980-2000.  This will require me to look into whether or not the countries involved actually implemented capitalism.  I believe that the argument went that the IMF and World Bank promoted capitalism starting in the 80's.  However, capitalistic critics of these organizations often contend that countries that actually made use of funds from these organizations were no more likely to implement capitalistic reforms than countries that did not.  In other words the organizations weren't very good at promoting capitalism.  I can't say for sure whether this is the case.