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Sunday, March 17, 2013

Government Spending, By Constituency, Shows Such Spending, Even If It Could Be Done For Free, Is Useless To The Economy

   John Redwood's latest discusses the effect of increased government spending during the Labour years, in particular (ie Labour) constituenceies and contains a remark I have put into inverted commas and given my answer to.

“Why didn’t the large expenditure of money in the poorer areas lead them to catch up with the richer areas? Why did inequalities expand rather than contract? Why did London continue to outperform the areas attracting the most public spending?”



A very good question. If government spending produces real net growth, not just more real growth than would be achieved by cutting taxes commensurately BUT ANY REAL GROWTH AT ALL there should be measurable convergence between areas getting increased government spending and those not getting it. In fact there seems to be a slight divergence, suggesting excess government spending may even have a net negative effect on growth.

  This does appear to me to be serious evidence that all the "stimulus" spending is not likely to have any positive effect on growth.

    This does not mean that a stimulus of reducing taxes would not work. I think that to some extent it would but whether the gain would be worth the long term extra debt repayment is open to question.

    Nor does it mean that all government spending - eg X-Prizes - could not produce growth, only that the sort of spending government currently chooses to do wouldn't.

   Nor, on the other hand, does it alter the undisputed evidence that money spent on regulation not only doesn't help the economy but costs the economy 20 times more than it costs the government to do. This means that the net effect of government on the economy is negative, currently reducing the economy by a minimum of 50%, probably 75% of what it could be.

   Nor, on the 3rd hand, does it mean society should never spend money on welfare. The argument for welfare is that we really ought to help those who cannot help themselves. It merely means that one cannot honestly support the welfare spending argumenmt with any claim that it will help the economy. In itself is likely to have no effect and by diverting these resources from the real economy is virtually certain to have a net negative effect.

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