Boost the Economy, Reduce Government

(Michael Chamberlain/Nevada Business Coalition) – 1-1=1. Welcome to the world of government math.

This weekend brought another flawed analysis attempting to convince people that they can improve their economic condition if they’d just give up more of what they earn to the government.

Deep spending cuts by state and local governments pose a growing threat to an economy that is already grappling with high unemployment, depressed home prices and the surging cost of oil. 

Lawmakers at state capitols and city halls are slashing jobs and programs, arguing that some pain now is better than a lot more later. But the cuts are coming at a price _ weaker growth at the national level.

This is single-entry accounting at its worst. Accurate accounting reflects what happens on both sides of the ledger. This analysis takes into account the activity on only one side and completely ignores where the these state and local governments get the money they spend.

Government has no money that it has not first taken from someone else. Every dollar that it spends must first be taken from the private sector, the only sector that actually produces wealth. So lower spending by state and local governments has no actual negative impact on economic activity.

To increase their spending, these governments would first have to take away the money they were going to spend from private sector companies and individuals. This would have the effect of reducing the amount of economic activity these people were able to engage in on a dollar-for-dollar basis.

In addition, there are businesses and individuals on the other ends of these transactions that would not happen who would also be affected. They would, in turn, have less to spend and invest, which would retard their economic activity. So there would be a negative multiplier effect by virtue of these governments increasing their spending. This would more than offset the positive effects the article assumes would occur from increased state and local government spending. In other words, increased spending by these governments would result in a reduction in economic activity rather than an increase.

Economic analysis that advocates for increased government spending to stimulate the economy is often flawed. Many times it ignores the damping effect that higher taxes can have on economic activity in the private sector. People change their behavior to lower their tax burden and higher tax rates also reduce their ability to spend and invest.

This type of static analysis is one reason tax increases rarely generate the additional revenue their proponents project they will. Remember the $1 billion in tax increases enacted by the Nevada Legislature in 2009? Tax revenues did not increase by $1 billion. In fact, they were less in the biennium after the enactment of these increases than in the prior period.

Increasing government spending is a drain on the economy rather than a stimulant. All of the money government spends must first be confiscated from the private sector. Doing so reduces the economy’s ability to generate economic activity and create wealth. Reduced state and local government spending boosts the economy; it does not slow it.

(Michael Chamberlain is Executive Director of Nevada Business Coalition.)