Can Government Spending Get America Back to Work?

Three years ago, there was great hope that the $800 billion stimulus provided for by the American Recovery and Reinvestment Act would get the country back on its feet. Yet, with millions of Americans still unemployed, the economy sputtering, and nearly a trillion dollars added to an already bloated national deficit, there are many in Washington who refuse to acknowledge textbook definition of insanity: that is, if government would just spend some more money to stimulate the economy, then we can expect a different result.

Unfortunately, as recent events have proved, government can’t spend the country into economic prosperity.

Instead, if we are going to ever get out of the current economic malaise, then we are just going to have to do it the old fashioned way: enact policies to get the private sector investing in America again.

New evidence, based on historical economic data, suggests this reliance on the private sector, and skepticism of the government’s efforts, is justified. For example, a study released this month looked at fifty years of data on government spending, Gross Domestic Product, private sector investment, and private-sector job growth. Using this data, economic history was divided into low-growth and high-growth periods. In so doing, the analysis permits an assessment of the stimulus effects on private-sector jobs of both government and private investment during economic downturns, and during economic expansions.

For those hoping the government can save the economy, the evidence is discouraging. During periods of economic sluggishness, like now, government spending has zero effect on private-sector job creation. This result is consistent with the impotence of the most recent rounds of federal government “stimulus” efforts that have failed to dent unemployment.

In contrast, expansions in private investment are effective at creating jobs in both good and bad economic times. Most interestingly, the efficacy of private investment is greater during periods of slow economic growth. By implication, public policies that discourage private investment may have severe job-killing effects during economic downturns, since it is during the low growth periods that jobs are most responsive to increases in private investment. In light of these results and the evident failure of government stimulus to restore economic growth, it is clear that job creation appears best served, under present economic conditions, by policies that encourage efficient private-sector investment.

So what to do? We can begin by improving the sentiment of both businesses and households by shrinking the country’s bloated regulatory bureaucracy. Even President Obama, who initially promised voters an aggressive regulatory agenda and has made good on that promise to a large extent, has now recognized that the excess of federal regulations “have stifled innovation and have had a chilling effect on growth and jobs…” A recent study estimates that each year, on average, a single federal regulatory employee (i) cuts GDP by $6.2 million; (ii) eliminates 98 private sector jobs; and (iii) destroys the equivalent of the economic output of 134 persons. Plainly, regulatory reform is needed sooner rather than later.

Common sense dictates that if regulators are forced to do their jobs with fewer resources, then the Super-Committee should seriously consider making responsible cuts to federal regulatory agency operating budgets. Perhaps with fewer resources, regulators will direct their activity to essential interventions rather than pursue marginal interventions and promote pet projects, perhaps at the behest of political donors. Research shows that reducing appropriations for federal regulatory agencies across the board by just five percent (5%) will create a staggering 1.2 million private-sector jobs and $75 billion more in GDP each year.

Obviously, responsible regulatory reform is just the tip of the iceberg. Other potential pro-growth strategies run the full gamut from tax relief, to tort reform, to deficit reductions. Yet, whatever the end prescription, the simple fact remains that the keys to a robust economic recovery are policies that liberate private sector investment from the manipulations and strangleholds of the social planning and inefficient government. Until policymakers put the “free” back into “free market,” America’s economy will suffer.

Lawrence J. Spiwak is president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a non-profit research institute based in Washington, D.C. A copy of the studies providing the calculations set forth above, Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study and Can Government Spending Get America Working Again? An Empirical Investigation, may both be downloaded free from the Phoenix Center’s web page at: www.phoenix center.org. The views expressed in this article do not represent the views of the Phoenix Center, its Adjunct Follows, or any if its individual Editorial Advisory Board Members.