In this episode, Gene Tunny explores the relationship between government spending and wealth creation. He talks about President Obama’s memorable expression, “You didn’t build that”, and how economists think about the role of government and wealth creation. Gene discusses the roles of both the government and private sector in generating wealth and their impact on productivity, GDP and living standards.
If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com or send a voice message via https://www.speakpipe.com/economicsexplored.
You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.
What’s covered in EP247
- Government role in the economy – private sector vs public sector. (0:00)
- Government spending and its impact on the economy. (5:52)
- Keynesian economics and the role of aggregate demand in determining GDP. (11:51)
- Government spending and its impact on productivity. (18:13)
- Government intervention in the economy, with a focus on public goods and cost-benefit analysis. (25:11)
- Government’s role in the economy, potential for crowding out the private sector. (31:32)
- Government impact on the economy and living standards. (38:20)
Takeaways
- Government Spending and GDP: Government expenditures can contribute to GDP, but their efficiency and the type of spending critically determine their economic impact.
- Private Sector’s Role: The private sector is essential in wealth creation due to its efficiency incentives, but it also depends on government-provided infrastructure and services.
- Crowding-out Effect: Excessive government spending can crowd out private investment, potentially reducing overall economic efficiency and growth.
- Cost-Benefit Analysis: It is vital to conduct thorough cost-benefit analyses for government projects to ensure that public funds are used effectively and do not become a drain on the economy.
Links relevant to the conversation
Dan Mitchell’s article on the impact of government spending on economic growth:
https://www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth
Dan’s article “OECD Economic Research Finds that Government Spending Harms Growth”
Episode on Alvin Hansen and Evsey Domar:
Episode on Thatcher:
https://economicsexplored.com/2020/12/06/ep64-adam-smith-margaret-thatcher-with-dr-eamonn-butler/
Bacon and Eltis’s 1978 book “Britain’s Economic Problem: Too Few Producers”:https://link.springer.com/book/10.1007/978-1-349-15863-8
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Transcript: Government vs. Private Sector: Who Generates Wealth? – EP247
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Jeanne, welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello. Thanks for tuning in to the show. Today, I want to cover an economic issue, and it’s also somewhat a philosophical issue that came up in a recent conversation that I had with Darren Brady Nelson on competition policy. To what extent is the government paid for by the activities of the private sector? To what extent is it a drain on the wealth of the community, is it only the private sector that generates wealth. You may remember that in the 2012 election campaign in the United States, President Barack Obama, in a speech in Roanoke, Virginia, famously said that somebody helped to create this unbelievable American system that we have that allowed you to thrive, somebody invested in roads and bridges. If you’ve got a business, you didn’t build that very, very controversial statement, very I mean, just goes to show what an effective speaker Obama was, that that phrase really captured a lot of people’s attention, and there’s an important economic issue there that I think it’s worth having an Episode on. So yes, I thought this would be a great topic to talk about relevant theory and evidence before we get into it. This episode is brought to you by Lumo coffee. So seriously healthy organic coffee with triple the antioxidants of regular coffee, there’s a 10% discount available for economics explored listeners if you use the promo code 10 explored. So that’s all in caps. You can check out the show notes for further details. Now, I should let you know I’m going to take a break soon from the show. I’ll see if I can get one more episode out before I go on the break. So I’ll probably have about four weeks off and then come back in August. I need to spend some time finalising the book I’m working on, and I need to spend a bit of time on that, but I will be excited to get back on to the podcast, and yeah, looking forward to trying to get more great guests and more great topics. I’ll be interested in your ideas on future topics or guests, or how I can improve the show. Let me know if you have any ideas. You can email me at contact, at economics explored.com, right? Oh, we’d better get into it. One reason I thought that this would be a good topic for the show is after this issue came up in the conversation I had with Darren, I found a passage on this issue in Hanson and Perloff book, state and local finance and the national economy, their 1944 book that I did an episode on a few weeks ago. That was the episode on Alvin Hansen and FC Domar. Now this is a very Keynesian book, and Keynesian economics has become controversial. And if you’re a regular listener to this show, you will know that we’ve talked about the debates about activist fiscal policy, having said that there is, there are some important lessons from Keynes that have been very influential in macroeconomics. So I think while Keynes is controversial, he is an important figure in the history of economic thought, and he has influenced the development of economics, and there are still Keynesian concepts that are very influential and widely agreed upon, even if all of the whole. The Keynesian doctrine and the the primitive Keynesian NISM that we saw in the immediate post war period, even if we now reject that, or most, or I’d say mainstream economists, would would reject that. So with that caveat in mind, we might, we might get into it, because I think what Hansen and Perloff wrote in this book, there is a lot of truth to it. Their discussion of this issue is very illuminating, and hence I think it’s worth us just going through it, and then I will provide some further thoughts and talk about views of other economists and what the evidence is telling us on this very important question. Now I’m going to read from Chapter Nine of the Hansen and Perloff book, public expenditures, income creation and costs. And I’m going to I’m going to start on page 184 and they write that the popular view is that government expenditures and activities are entirely sustained and supported out of income derived from private business. This is quite wrong, as a little economic analysis will reveal the public expenditures made in operating a public school are no less income creating and productive than a private business, say, a cosmetics factory. Indeed, the public school is productive, not only in the sense that it supplies a once satisfying service, as does also the cosmetics factory, but also in the respect that it increases the efficiency and productivity of the future labour force of the nation. Okay, so that very you know, that’s a very good point, and you know, that’s where you know that’s consistent with what Obama was saying, in a way. I mean, Obama’s making the point that public services are helping the operations of the business. Now, of course, you do have to think about the efficiency of those public services or public goods that are provided, which we’ll talk about later. But I think what Hansen and Perloff write, what they’ve written there, is, is sound okay. Let’s go on economic activities, whether governmental or private, involve two operations with respect to their income, with sorry, with respect to their impact in the flow of income, which must be entered on opposite sides of the ledger. And quite erroneous conclusions follow by looking at one side and closing one’s eyes to the other side, with respect to the cosmetics factory, the erroneous argument might be advanced that it is a burden on the community, since the sale of its products drain off a part of the money income flow from the community, that the cosmetics factory is dependent upon all other businesses, since they are the ones that create the income stream and purchasing power enabling the factory owner to find a market for his product. This analysis would, however, be quite unfair to the factory owner, since, in fact, at the same time that he taps a stream of purchasing power and selling his product, on the other side, he turns an equivalent amount of purchasing power right back into the income stream through the expenditures involved in operating the factory, he therefore sustains other businesses just as much as they sustain him. Okay? So, yep, fairly important point there, and that goes to show the the interdependence of all of the the businesses in an economy. So businesses, households and also government, as we’ll talk about, they are all connected. They interact. There’s flows of money, flows of goods and services between them. So very, very important point there we shall proceed. Precisely the same is true of government expenditures and activities. The government, in operating the school, taps a part of the income stream in the form of taxes, but it throws this right back into the income stream through the expenditures made in operating the school. It is not true that government is sustained and supported out of private business any more than the prior than that private business is supported and sustained out of government expenditures and activities in. Okay, so what I would say regarding that paragraph is, look, that’s all fair enough. If we think about it from a normative perspective, though, if we think about it from in terms like more philosophically and make value judgments, where I think some people start to wonder about how we measure economic activity. We’ll get onto this soon, and the value of economic activity. You you might think, well, if we’re talking about goods and services sold in the market, and we work out their value, there’s the presumption that, well, because people paid for those goods and services with their money, with their own money, they at least valued the good and service as much as the price of that good and service, whereas, with government, if the government provides goods and services to the public and it’s funding them from taxation, and we don’t really have a say, I mean, maybe at the ballot box we can have some influence on it, but we we basically have to pay the government. We have to pay our taxes. We don’t really have a lot of say in it individually. Then they provide us goods and services, and when we add them up and put them into GDP, they go in at the cost of delivering those services. But who’s to say they’re really of that value, and we might talk about that a bit later too. So that’s the that’s one commentary I’d make on on what Hansen and Perloff are saying so far. I mean from a factual point of view, from the point of view of impacts on GDP, then they are absolutely correct from the point of view of what this means normatively, or what it means philosophically, I suppose, then, well, you could argue that that may be the case in terms of impacts on GDP, but it may be that the government, what the government spending money on, isn’t sensible. It’s not a good use of our tax dollars. And the point I’ll make even further later is that to the extent that government isn’t spending on sensible things, to the extent that it’s not doing the job it’s supposed to, in terms of supporting the generation of or supporting the productive capabilities the economy, or it’s not providing essential goods and services to the people, then it may well be wealth destroying. We may well have, we may well be able to achieve a higher GDP per capita if we, if we cut some of those inefficient government activities, if we if we cut taxes, if we move towards greater provision of the market sector, that’s a that’s a possibility that I wouldn’t want to rule out. So that’s my one commentary on what’s been written so far. I mean generally, factually, in terms of what it all means for GDP, it’s sound that we should also be thinking about whether we could be doing things differently, whether what government is funding is giving us the best value for money. Okay, we will go on. No private business can sustain its sales volume unless the outlays of other businesses and the government continued to feed the income stream. Nor is private business as a whole self sustaining. It was not self sustaining when the national income fell from 80 billion to 40 billion in the early 30s. So that was the Great Depression. Obviously, that was me saying that not Hansen and Perloff, nor indeed in any other period of depression, the sales receipts of private business, no less than the tax receipts of government, depend upon the maintenance of a high national income, and the outlays of government can and do contribute to a sustained national income no less than the outlays of private business. Indeed, when private business outlays decline, the government alone is in a position to go forward and sustain the income through increased expenditures. Okay, so that’s that’s a very Keynesian one. Point there that in the short run, the level of output, the level of activity, the GDP, is determined by aggregate demand, so the sum of what all of the different sectors are wanting to purchase, in terms of goods and services, and in our national income accounts, GDP, that is equal to aggregate demand, which is equal to the sum of the expenditures by the major sectors. So we’re talking about consumption expenditure, Big C, plus investment expenditure by business, big i, plus government expenditures on goods and services, including infrastructure. This does not include transfer payments, so we talk about them a little bit later. Plus exports minus imports. That’s the net exports component. So we typically see aggregate demand written as C plus I plus G plus x minus m equals y, which is income or GDP, because GDP is defined and is constrained in the short term by the level of aggregate demand, because if people don’t want to purchase the goods and services, then they won’t get produced, and income and employment will fall. So output gets constrained by aggregate demand. That’s one of the core messages in Keynesian economics. And I mean this is, this is something that is widely accepted by economists, that the role of aggregate demand in determining short run, GDP, what happens to the economy in, you know, over in the you know, currently, what, what’s, what’s actually driving economic circumstances? It’s, it’s influenced by the level of spending. That’s, that’s something that’s widely agreed, how, what, what ends up being controversial, as we’ve talked about in in other episodes, is to what extent governments should actively intervene to try to get GDP closer to some desirable level. So Should they actively intervene if GDP, they think GDP is too low for in a depression, should they try and stimulate the economy, or should they try and take some of the heat out of the economy by running a budget surplus so that that there’s more of a debate about, well, there’s a big debate about to what extent governments should be pursuing activist policies, beyond what are called the automatic stabilisers, where the budget naturally reacts to the business cycle, where if the economy slumps, you have less tax revenue, more unemployment benefits. So there’s this automatic stability built in, in a way, and I’ve talked about that in other episodes. So we may not, we may not cover it. I won’t cover it in too much detail. Now, the other thing I should talk about here is this point about taxes and transfers. I said that the government expenditure item in the national accounts doesn’t include taxes and transfers, because where that gets picked up, picked up that will get picked up in the in the consumption spending item so any so what will happen is that if governments, to the extent that governments are taxing and then transfer that money to households, those households spend that money on consumption goods and services, And that gets picked up, picked up in the C item that the transfer spending itself doesn’t add to GDP, it’s just redistributing the taxes and transfers are redistributing incomes from some households to others and helping those other households consume goods and services. Okay, so there’s just one more paragraph from Hansen and perlifer I’d like to read before we I had more of my own commentary the view that public investment is unproductive while private investment is productive, will not withstand careful analysis public investment, just as with private investment, may be merely utility creating, or it may be also or it may also be efficiency creating, the development of a public. Park, swimming pool, playground or concert hall, makes possible a flow of real income, no less than the creation of a radio factory. Public invest, investment in the National Forest, by preventing soil erosion and floods or the construction of school buildings, may contribute to raising the efficiency of labour, no less than private investment in improved machinery. Public investment, like private investment, if wisely made, will be utility creating, or both utility and efficiency created. So yes, the that final, that clause there that that final part of the sentence, where they go, if wisely made, will be utility created, or both utility created and efficiency created. So there, Hansen and Perloff do acknowledge the point that, okay, all of this assumes that what the government’s spending money on is sensible. It may add to GDP in a statistical sense, and it may well employ people, but in terms of whether it actually creates what we might call utility, or whether it improves efficiency, that’s that’s another question that depends on the quality of the spending. I mean, sadly, governments can waste, can waste a lot of money. We can have programmes that that are essentially, you know, not contributing a lot to the community, and end up being brought to a bit. Darren and I, when we chatted, we talked about the National Disability Insurance Scheme here in Australia. So a very noble scheme. And perhaps, I mean, it is doing a lot of good. I suppose there are a lot of people who are benefiting of it, from it, but it is very expensive, and there are, there is a lot of Rorty. Now, all of this is to say that we should be thinking about what the expendit, what’s what’s happening, if what government is doing, whether the dollars that we’re taking that might otherwise be employed in the private sector, whether they’re most productively employed in private or public sector, what’s best for productivity? And that brings me to a famous quote from Paul Krugman. I think it was in his book peddling prosperity. But I could be wrong about that. I’ll have to check that where Paul Krugman wrote that productivity isn’t everything, but in the long run, it is almost everything. So while I I think Hansen and burloff, their analysis of what government spending means in an economic sense is is correct, I’m not, and I think they do recognise the qualifications that I’m about to make. Maybe they have a different judgement as to how, as to how big of a an issue. This is the than I do. But it can be the case that if government’s not spending money wisely, then that’s not going to be good for your long run. Living standards, more spending and transfers, they mean higher taxes, particularly on employees and businesses. And that’s going to impact efficiency. It’s going to impact economic efficiency. Taxes create what’s known as a dead weight loss, an excess burden. They can discourage productive activities. They can discourage people from working or opening businesses. They can discourage people from consuming certain goods and services that that would make them better off. So I think the question we have to ask is, what’s the most productive use for our resources, where we’re thinking about what’s going to deliver the best bang for buck, what’s going to give the best ROI, and we think we should think broadly about what that ROI is. It’s not just going to be, it’s not necessarily going to be what it’s not neces it’s not necessarily, it doesn’t necessarily have to mean that it. It generates an ROI in for the business community, it could be an ROI in terms of providing services, goods and services, education or health, government services that are valued by the community, if a government can do an activity more productively than the private sector. Yeah, or do an activity that the people demand, but which gov but which the market will fail to provide, then that’s fine. I mean, government should be doing that. And so we have various public goods, such as national defence. The traditional example is a lighthouse. You often hear that given as an example, but there’s a wide range of public goods out there. There. There would be a free rider problem if we were relying on the private sector to provide them. So there’s there’s scope for government intervention. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There I mean, there have been those botched privatisations in the UK, for example, particularly in rail and it looks like water. So I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally, the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that. Well, I mean public sector unions, for example, or construction unions, which where they have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programmes and spending. I think that is something that is worth thinking about. Here. I should make the standard point that economists always make that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programmes and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s, maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise, a simpler type of analysis, but we should be thinking, whenever we’re spending money on on government goods as government purchases of goods and services, we should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting a benefit to cost ratio above one, a return on investment, we’re effectively burning money, and the government is then detracting from the wealth of the community, in my view, because that money would pro it would have been better if that activity was not done, if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they, they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. One, one example that comes to mind, there’s a new Weir on the Fitzroy River in central Queensland. I actually visited it. I visited it just before it opened. I got a tour of the construction site. Thanks to Sun water, the project proponent. It’s the Queensland Government’s irrigation water business. I mean, it’s a very impressive Weir, and it’s certainly going to deliver some benefits to the community, in terms of, well, there’s, you know, it improves the reliability of water supply. There are some local farmers, they’ve built, uh, they’ve constructed pipes that hook them up to the the weir, and they’re going to be getting water from that. And I think they’re planning things like macadamias and and. Other crops that you need to that you need to water. So there will be some, I mean, you need to irrigate, rather than just rely on the the water from the from the sky, for relying on rainfall. So this is certainly going to expand agriculture, irrigated agricultural production. The problem was, it’s a very high cost dam. It was already going to cost 200 or 50 million, I think it was, and it ended up blowing out its costs. And it’s costing 450 to 500 or something like that. So it was a big cost blowout. And the economics of the dam are pretty of the we are a fairly questionable. There was a business case prepared for it that showed that it had a benefit cost ratio. I think it was under point five. It was, it was rather embarrassing, but the government went ahead and built it anyway, I think because there was such political pressure to build it, and you could argue, well, let’s help it sustain those regional communities. So maybe there’s an equity element to it, but yeah, unfortunately, even where governments do cost benefit analyses, even sometimes they ignore them. So having said about having just talked about the importance of cost benefit analysis, I just note that it’s, it’s not always the cure, and often governments go ahead and, do you know, spend money unwisely anyway. But that, of course, is not going to stop me from arguing always in favour of crunching the numbers right. I might, might go on to a few other things I’d like to talk about before we wrap up. I talked earlier about the the issue, the problems you have when you do have a larger government sector, and you can crowd out the private sector, and you can end up in a situation where, by I mean, that can, that’s going, that’ll affect your living standards. Because even though the government may be boosting, you know, it may be adding to GDP, the C plus I plus G plus x minus m, it could be the case that if those resources were better deployed, then GDP were would be higher and and also, in an international comparison, your GDP per capita would be higher through Well, you know better, better use of resources in your economy. Your economy is more productive, and also because the economy is producing more things that you can sell overseas, that people overseas might want to buy, and therefore that helps improve your exchange rate. You’re not sucking resources out of out of the private sector. So this crowding out, I mean crowding out so well, well known phenomenon in economics. But there was a famous book in the late 60s or early 70s, actually might have been 70s, the bacon eltus thesis, 1976 it was, which was a really interesting diagnosis of the economic problems that Britain faced in the 70s. And this is essentially what led to Thatcher taking over? I did a podcast episode on Thatcher a few years ago. I mean, Thatcher is a, I mean, she’s a very controversial figure. And they’ll, I mean, a lot of people really hate Thatcher. And I mean, certainly she, you know, she was, yeah, she’s, she was a very controversial figure. But the what, if you look at where Britain was economically in the 70s, then really Thatcher taking over and, you know, having to, you know, really shake up the economy. That was inevitable, given that the state the economy was in, the stagflation, the excessive industrial action garbage piling up in Leicester Square in London because there was a strike of the the garbos. It’s, it was really awful time. And this book, this was written by Robert bacon and Walter eltus. So eltus was chief economic advisor to Michael Heseltine, or Heseltine in the Department of Trade and Industry from 1992 until 1995 and he also edited Oxford economic papers. So he was an economist, and he ended up going on to be an advisor to a minister in the major government made John Major followed Thatcher in the he was a Conservative Prime Minister after Thatcher. So their book Britain’s economic problem too few producers that argued that it was the rapid expansion of the public sector that was contributing to Britain’s economic difficult. Is during that period because it was taking resources. It was taking labour and capital out of more productive uses of the private sector and into the public sector. And yeah, so that was a rather influential book at the time, and I’ll put a link in the show notes it. It goes to show that. And I think this is a this is a qualification that I think Hansen and Perloff themselves would have accepted, that, you know, while the government can contribute to the wealth of the community, while the government can help the private sector be more productive. And while the government can provide goods and services and it can invest, it can it can provide capital goods. It can produce public capital, public assets that are of great value, unfortunately, it can also produce things services that aren’t, that are inferior, that are that aren’t as good as what could be provided in the private sector, and in those cases, that it’s subtracting from the the wealth of the community, or we could be richer if we had a shift from government to the private sector. So look, it’s a difficult one, because I do recognise that I get a lot of benefit myself out of public services. In particular, what I the one I think about all the time is the Roma street Parklands in Brisbane, which were built by the state government. Here, there’s an amazing park with a beautiful spectacle garden. And there’s a a great walk that I go on every morning. I go up to, up to the parklands, and I walk through the parklands, and there’s a there’s a rain forest, part of it, there’s a bridge, the Fern Gully bridge, I think it’s called that. I that I go on. It’s been, it’s closed for maintenance at the moment, but it’s just amazing. And that’s that’s a public asset, and my life is is better because the government built that, that public asset and and they maintain it. So I’m not going to say, look, government’s terrible. Let’s get rid of government some government services are are valuable. There are at the same time, you’ve got to recognise that there are cases where public provision of services is is subpar and it’s not. Maybe we could be better off if we have a shift to the private sector. And I mean, maybe this isn’t the best example, but we know that there are a lot of failing government school funded schools out there. We have a real problem in Australia with the lowest performing schools. I think they’re letting down the people in those in the areas where they they’re serviced by these subpar schools. And we should be thinking about whether there’s whether there’s an alternative, whether we can rely on greater school choice, charter schools, etc. That is a big issue, and one I should come back to in a future, a future episode. One person who has a really good take on this issue that we’re talking about today is Dan Mitchell, who is a is a guest. He’s been a former guest on this show. Dan’s been on, oh gee, a handful of times at least, we had a conversation recently about US debt. Dan wrote a really good piece on relevant to this question of how government impacts the economy, how it impacts wealth, the impact of government spending on economic growth. This was for the Heritage Foundation. This is, this is about 20 years old. This piece, I’ll put a link in the show notes, it’s very good. Dan writes that economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance. Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth, and other circumstances in which higher levels of government spending would be desirable. If government spending is zero, presumably there will be very little economic growth, because enforcing contracts, protecting property and developing an infrastructure would be very difficult if there were no government at all. In other words, some government spending is necessary for the successful operation of the rule of law. And then he goes on to say that, that said, well, in his view, most government spending has a negative impact. And. And there’s overwhelming evidence that government spending is too high and that America’s economy could grow much faster if the burden of government was reduced. Okay, so that those point, those final points, are probably going to be more controversial. But the I think what the passage I read out before from Dan, I think that’s, I think that’s very non controversial. You know, he’s saying it’s all about getting the right mix, the right balance. And then you can have an argument over whether, you know, we’ve got too much or too little at the moment. I mean, I probably share Dan’s presumption that we’ve got too much government. But then there are others. I mean, folks at The Australia Institute here in in Australia, and they’re arguing, oh, we should actually have more tax, we should have more government spending, and we’ll be better off. Okay, that’s, uh, that’s an interesting perspective. It’s not one I share. But, I mean, they’re entitled to it. Perhaps I’ll, uh, I’ll have, I’ll have Richard Dennis, or one of his colleagues on the show one day to talk through that. Okay, so that was, that was a broad discussion about the theoretical and philosophical issues associated with government involving in the economy, and to what extent it affects, like, how does it affect living standards? How does it affect the wealth of the community? I mean, clearly we just can’t say something like, government doesn’t create wealth, it just subtracts through wealth. That’s not true, but we should be thinking critically about the how our resources are used in the economy. To what extent are they used by government versus the private sector, and whether we can have a better mix, whether we could be have a higher GDP per capita, whether our living standards could be higher if we move resources out of government back to the private sector. I think that’s a that’s a legitimate question, even if the sort of the simplistic point, or the simplistic argument that the government is just dependent on the private sector and it’s it doesn’t create any wealth itself, even if we reject that, we still recognise that government can be too large. And in the view of economists such as Dan Mitchell and myself, I must say, I think it is too large. I think we would be better off with a smaller government. Okay, one point that you know, I’m going to talk a bit about empirical evidence now before we wrap up, because I think it’s important to always look at the data. What does the data tell us? And Dan, Dan always saw talks about these OECD studies, so he always criticises the OECD you says, Oh, well, you know, you’ve got all of these bureaucrats over in Paris and highly paid and but they’re they’re always saying, Oh yeah, let’s just raise taxes on everyone and spend more money. However, he does note that their research departments, the research part of the OECD and also the IMF, often produces research which contradicts the policy views that are being advocated by these international bodies. And Dan wrote a post, OECD Economic Research finds that government spending harms growth. I will link to it in the show notes. This was back in 2016 very good post. And Dan wrote that a new working paper by two economists at the OECD contain some remarkable findings about the negative impact of government spending on economic performance. And what it found is that, yeah, there certainly is an impact that when they did the cross country data analysis, they did some econometrics, if I remember correctly, they found that larger governments are associated with lower long term growth, and larger governments also slow down the catch up to the productivity frontier. Okay, so the larger the government sector, that’s going to constrain the productivity of your economy. It’s going to adversely affect it, which is in line with what I was saying before. Okay, so there’s some good evidence there. I’m going to link to that in the show notes. That’s, that’s worth that’s worth checking out. Okay, so I hope you found that episode informative. I think it’s an important question, and it it is worth us thinking carefully and critically about how government does impact the economy and our living standards. I’ve given an introduction to this topic and have provided some of my own views. Now, of course, they’re my views, and your views may differ. You may have. Different experiences. I mean, you will have different experiences from me. You may be aware of of different evidence that’s out there. So I yeah, I’d really love to hear from you if you have any thoughts on what I’ve said this episode. If you think there’s there’s evidence, or there are points that I should be considering, then please get in touch. Let me know what you think. You can email me at contact@economicsexplored.com I’d love to hear from you, and I hope that you tune into a future episode. So I’ll be taking a break soon, but should be back strongly in August 2024 I may have one more episode before then I’ll see how I go. But thanks for joining me. I think this is these are important issues to talk about, and I really hope you got something out of it. Thank you. Bye.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
