Should the U.S. Federal Government Downsize to Increase Economic Output? (and Additional Information on the Armey Curve)

The Joint Economic Committee Study done by the United States Congress in 1998 illustrated the impact of federal government size on the economy.

• The following chart shows 10-year growth rates in the economy since 1799.
• The average growth rate of the economy for any 10-year period since 1799 is 49.12%.
• Therefore, the growth rate of the economy has been decreasing for the past 200 years.

• “The output slowdown is not unique to the United States. Growth rates in Europe, for example, are lower in the past generation than in the preceding one. Both Europe and the United States have had a marked growth in the size of government relative to total output in recent years.”
• “By contrast, growth rates in many nations of Asia today are higher than a generation ago. In many of these places, such as Hong Kong or Korea, the private sector’s growth has been faster than that of government. That is particularly true in the region’s giants, China and India. As government’s role in resource allocation has declined relative to that of the market-based private economy, it seems that growth rates have accelerated.”
• For each 1 percent increase in the government share of the economy (GDP), the GDP itself falls by about $30 billion (in 1992 dollars)
• “The data here suggest that a further reduction in government size to 17.45 percent of GDP would be growth enhancing.”

• Transfer payment programs (incorporating income security, health, medicare, and social security) reached their optimal size from an output maximization perspective at about 7.33 percent of GDP, about the level reached in 1974
• “There is no statistically significant relationship between spending on health and [economic] output.”
• The findings seem to contradict the idea that “‘imperial reach’ may be contributing to U.S. economic decline.”
• The only category of federal spending, which shows some positive relationship with [economic] output, is the category that includes such things as educational, highway, environmental, agricultural, and foreign aid spending.

Conclusions for the size of federal government to increase economic output:

• “reduce federal expenditure growth in general below that of total output growth, thereby reducing the claim that federal spending makes on total output;
• place particular emphasis on containing transfer payments, stopping their growth relative to income and output. These results support the arguments of persons advocating limiting the growth of entitlements.
• the maintenance of balanced budgets would appear to be useful, inasmuch as that would reduce net interest payments of the federal government as a percent of GDP over time.”

To read additional information on state and local governments and whether they should downsize, click on Should the U.S. State and Local Governments Downsize to Increase Economic Output? (and Additional Information on the Armey Curve). To read the entire Joint Economic Committee Study, click on Government Size and Economic Growth.