Government Spending Can't Buy Prosperity

COMMENTARY Budget and Spending

Government Spending Can't Buy Prosperity

Oct 24th, 2001 3 min read

Visiting Fellow in Welfare Policy

Ronald Utt is the Herbert and Joyce Morgan Senior Research Fellow.

President Bush tells Americans that if they want to help the American economy, they should fly again, start and expand businesses, save, invest and take vacations. New York Mayor Rudy Giuliani has a TV ad out now extending his "personal invitation" to come to New York for ball games, Broadway plays and fine food.

Many in Congress have another plan to revive the economy. They propose massive amounts of new federal spending to "pump up" the economy -- to finance such projects as a high-speed rail line from upstate New York to New York City, to shower subsidies on Amtrak, and to make infrastructure improvements that would cost $50 billion or more.

We're at war, and it's not cheap. One month, Congress was haggling bitterly over whether to approve $8 billion for missile defense. The next month, a $40 billion spending bill for national security and damage recovery sails through both houses in less than three weeks. Much more is sure to be needed, and virtually everyone agrees something must be done to kick-start the economy.

How we do this, though, is crucial. Do we respond to the terrorist attacks by building commuter rail systems? Or do we spend what we must to repair the damage, help the victims, strengthen counter-terrorism and the military -- and spend what we can on permanent, substantial tax cuts to stimulate the economy?

You only need to know a little history to know that tax cuts -- not more government spending -- are the way to go.

During the Great Depression, we went the "more-spending" route. Between 1930 and 1940, federal spending tripled as government scrambled to get things moving again. Halfway through the decade, gross domestic product had fallen 27 percent. By 1940, unemployment had more than doubled.

Japan tried the "more-spending" route, too. With its economy struggling in the early 1990s, Japan implemented 10 spending packages -- all centered around costly public-works projects -- worth $254 billion. The result? Its industrial base languished, its standard of living slipped, and the government hemorrhaged red ink. Asia's economic star went from being a high-growth wonder in the 1980s to a slow-growth basket case in the 1990s.

Contrast Japan's experience with Ireland, which reduced government spending by sizeable margins in the 1990s. Government has shrunk, and its standard of living has soared. Once one of the poorest countries in Europe, Ireland is now one of the richest.

But the point is not just that more spending doesn't work. It's that President Bush's way -- growing the economy with tax cuts and holding the line on non-military, non-terrorism spending -- does work. John F. Kennedy proved it in the 1960s, and Ronald Reagan proved it again in the 1980s.

President Kennedy, who inherited a sluggish economy when he took office, persuaded Congress to pass a large tax cut. In response, gross domestic product grew 50 percent during the decade, then a post-war-record. Then the 1981 tax cuts of President Reagan led to what then became the longest peacetime economic expansion in U.S. history. That record stood until the 1990s, when smaller government produced still more growth.

To be fair, Congress' job isn't easy. The prospect of a federal spending spree brings goose bumps to lobbyists and others who feed at the federal trough. Vast legislative agendas have been concocted overnight at the mere prospect of Congress using more federal spending to ward off a recession.

Suddenly, Sen. Harry Reid, D-Nev., is proposing $40 billion in new transportation spending, $12 billion of which would go to Amtrak (which never has come close to self-sufficiency, let alone profitability). New York Gov. George Pataki is asking $54 billion for, among other things, a high-speed rail line. Rep. James Oberstar, D-Minn., has his own $50 billion stimulus package, and Rep. Don Young, R-Alaska, wants $70 billion in loans and grants for railroads.

But Congress must reject this line of thinking. Yes, we need more spending -- but by taxpayers, not by government. If Congress wants to help, it should cut taxes to encourage work, saving and investment. If it was possible for the government to bring prosperity through more spending, it would've happened a long time ago. 

Ronald Utt, a senior research fellow in economic policy studies at The Heritage Foundation, served as privatization "czar" for President Reagan.

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