At the Economic Dinner Table There Is No Free Lunch
Liberals argue that government can take care of the needy, while creating prosperity. That sounds like a free lunch, and seldom in the real world do we find such a thing. Expert economists make all sorts of claims, many competing, and it is difficult to sort it all out. Some claim that more government will fix things and some claim less government will fix things.
At least from this perspective there are just two choices to think about -- either we grow or shrink government to get out of this hole.
Armey Curve
Dick Armey, former Minority Whip under Newt Gingrich, observed that countries ruled by anarchy or totalitarianism are not prosperous. Between the two extremes of no government and totalitarian government, Dick Armey noted that there are nations, such as the US through most of its history, in which the economic growth is robust, jobs are plentiful, and there is prosperity.
Armey suggested that the size of government impacts the prosperity of a nation. Too much or too little government and a nation is not prosperous, but somewhere between those two extremes is a point at which a nation is very prosperous. This idea is captured in the aptly named Armey Curve, which is similar in shape to that of a Laffer Curve (see http://www.heritage.org/research/reports/2004/06/the-laffer-curve-past-present-and-future).
The Armey Curve simply says that if government spending is too high then a cut in government spending will cause the economy to grow faster. On the other hand if the government spending too low, increased government spending (on things that spur growth) will cause the economy to grow faster.
Armey Curve Study
In December of 1998, the Federal Government’s Joint Economic Committee Study examined the Proposition of an Armey Curve using data from the U.S. Economy (see http://www.house.gov/jec/growth/govtsize/govtsize.htm). The report found an Armey Curve effect in the historic data and that government had grown to such a size that economic growth was harmed in 1974.
In the years of Bill Clinton when Newt Gingrich and Republicans held down the size of government, GDP grew almost precisely 1% more than it would have without these constraints from 1991 to 1997. Since that time the government has grown and the economy has continued slowing. I have updated the the Armey Curve data (Figure 1) and it now says that economic harm began in 1975. In any event somewhere in the Carter Administration government has grown to a size that it is harming economic activity.
In Figure 1 the wavy line is the year-by-year growth, and it is rather jagged. The smooth line is the estimate for the Armey Curve of this data. One can see the very clear trend of economic growth gradually increasing until around 1975 after which it declined. Recall that the Armey Curve argues that government growth will cause the economy to slow down.
In Figure 2 we see the growth of government spending since 1950. We can see that government spending began to soar as Johnson’s War on Poverty and Great Society Programs fully kicked in. It has continued to grow as a percentage of GDP since 1950 and since 1975 the economy has slowed as the government grew.
Conclusion
When politicians argue for more spending to help our fellow citizens, that is one thing, But when they tell you that they can do that AND make our nation prosperous then clearly they are lying. If we want jobs and prosperity then we need to return government spending to the levels, relative to the size of the economy that it was in 1975.
Obama talks about not going back and then he talks about growing the economy. Obama's trajectory for government is obvious -- bigger and bigger. If he grows government as is his goal then the economy will continue to slow and the United States will suffer an economic disaster.
That’s the story. We can have a Welfare State or we can have prosperity. We can’t have both, as there is no free lunch.
Figures
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