State spending doesn’t boost growth


By John Hood - Guest columnist



John Hood


There are just as many fads in politics as there is in other fields of human endeavor, from entertainment to home remedies. Speaking of which, a current fad in political discourse that neither entertains nor remedies is to accuse your opponents of being “anti-science.”

Progressives routinely hurl this accusation at conservatives and libertarians, arguing for example that we deny the clear findings of science when we reject various schemes aimed at curbing climate change.

Actually, most conservatives and libertarians accept the propositions that average global temperatures are rising and that human activity is likely playing a role. But we observe that current forecasting models have mostly over-predicted the rise in temperatures (such errors can’t be random) and that, even if the models were accurate, the costs of implementing climate-change regulations, measured in lost jobs and incomes, vastly exceed any net benefits from the projected drop in future temperatures, measured in the tenths or hundredths of a degree.

So the Left accuses the Right of discounting basic climate science. The Right accuses the Left of discounting basic economic science. The underlying policy debate is worth having, of course, provided it doesn’t devolve into juvenile taunts and caricatures.

You can see a similar dynamic playing out in North Carolina regarding the state budget. Since 2011, the Republican-controlled General Assembly has enacted a series of tax reforms and reductions. At first, lawmakers passed them over the veto of former Gov. Bev Perdue, a Democrat. Then they worked with former Gov. Pat McCrory, a Republican, to pass more-sweeping tax measures. Our average tax burden has dropped significantly as a result, while North Carolina’s ranking in business tax climate has surged to 11th best in the nation, up from 41st as recently as 2013.

In the next few weeks, the two chambers of the General Assembly will hash out yet another measure to reform and reduce state taxes. Another Democratic governor, Roy Cooper, seems likely to veto it. Debate will ensue. And you’ll hear another round of accusations about the other side rejecting science — in this case the social science of fiscal policy and economic growth.

Republicans contend that tax policy has a significant effect on the decisions of households and businesses. Lower, less-disruptive taxes encourage work, savings, investment, and job creation, they argue. Democrats respond in part by contending that spending more money on education, infrastructure, and other state programs would have a larger positive effect on the economy than reducing taxes would.

It’s obvious these two contentions reflect contrasting philosophies about the role of government. But they also constitute empirical claims — that is, statements about what is, rather than what ought to be. Such claims are testable by economists and other social scientists. Over the past quarter century, they have produced hundreds of studies in peer-reviewed academic journals to test the claims.

Generally speaking, the Republican contention has fared better. Most scholarly studies have found that lower taxes are associated with stronger economic performance. The most consistently negative results involve taxes that affect capital formation, such as corporate and personal income taxes.

On the other hand, academic studies don’t typically find a link between state spending and economic growth. Since 1990, for example, there have been by my count 112 studies in peer-reviewed journals regarding state or local expenditures on education. Only 34 percent found a positive association with economic performance. The results were a bit better for spending on roads or other infrastructure — 42 percent of recent studies found a positive association with economic performance.

Does that mean Democrats who oppose tax cuts are “anti-science”? Not necessarily. They are right to observe that states with extensive, well-maintained road networks and relatively high levels of educational attainment tend to grow faster than average. Their mistake is in assuming that more state spending will necessarily produce large improvements in state services.

It certainly has had that effect sometimes, especially early in the growth of state governments. But not so much lately. Instead of trading insults, can we talk about that?

John Hood
http://www.clintonnc.com/wp-content/uploads/2017/04/web1_JohnHood2-6.jpgJohn Hood

By John Hood

Guest columnist

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.

John Hood is chairman of the John Locke Foundation and appears on the talk show “NC SPIN.” You can follow him @JohnHoodNC.

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