GDP: Government, Democracy, Prosperity

Public spending has been under relentless attack in the U.S. since before President Ronald Reagan first took office.  The notion that “shrinking government” grows the economy, builds character and may even save our immortal souls is now one of the verities of our political discourse: public=bad; private=good. Indeed, it was the central belief uniting Tea Party members during this year’s campaign. Research and experience don’t support this conviction, but here we are.

The massive government spending that was deployed to push the economy back from the brink of depression has aggravated the always inflamed passions on this issue. With red lights flashing and sirens wailing, anti-spending Tea Party-backed politicians are now riding to Washington to slay – or at least rein in – the beast of government.

This is the narrative we live with.

There is an alternative narrative however, supported by years of research, that tells a different tale, one in which public spending is a positive good, for the economy and society. In this narrative, public spending rises naturally as societies prosper and voters – demanding better infrastructure and better public services for themselves and their families – understand the need to pay for the kind of society in which they want to live.

No, I haven’t been smoking anything. I’ve been reading Why we need public spending, a paper produced by the Business School at the University of Greenwich, in the U.K., under commission from Public Services International.  Some of the findings appear commonsensical. For example, public spending is a key factor in economic growth and development. Why? It is “essential for financing infrastructure, including roads, electricity, and water." The report argues that public sector spending provides the “health and education services necessary for modern economies more efficiently and effectively than the market could provide." There are data bits that may surprise readers: “About half of all the jobs in the world are supported by public spending, two-thirds of them in the private sector through contracts and multiplier effects. Most sectors of the economy are now connected to public spending through subsidies, contracts and investment finance."

Finally, the report points out that, over the last 150 years, public spending has risen in all countries, and that there is a “statistically significant link”  between public spending and economic and social development” in developing countries as well as wealthy countries, a correlation first noted in the 1880s and repeatedly confirmed since that time.

The paper’s findings on taxes may be even more startling for many Americans, for whom Tea Parties, ala 1776 and 2010, seem part of the national DNA:  “Like spending, levels of taxation rise alongside economic growth: low tax economies lag behind in development” [emphasis added]. It notes that the burden of taxation has become less fair, in part because “companies have managed to pay less and less, despite a rising share of national income. (See here for more on this.)

For me, one of the most interesting findings was the link between high public spending and a healthy democracy. It seems that “active democracies” are more responsive to the needs of citizens, thus generating public spending levels that are higher than those of more authoritarian regimes. Moreover, democracies with voter turnout rates in excess of 50 percent “reach higher levels” of public spending than do less participatory democracies.

The paper also points out the obvious: The recent, violent uptick in government spending was prompted by global recession and by efforts to rescue the finance sector from its own abuses, which threatened the still-wobbly international financial structure.

The report draws on 12 years of research carried out by economists, political scientists, civil society groups, and European unions, as well as academics from the University of Greenwich Business School. It is crammed with data on public sector spending, the current financial crisis and more. It is well worth perusing, if only as an antidote to the anti-government narrative that is now driving public policy in this nation.