October 22, 2001

October 22, 2001 | News Releases on Federal Budget

Congress Can't Help The Economy By Spending More, Analyst Says

WASHINGTON, Oct. 22, 2001-The amount of new federal spending some politicians are seeking is staggering, from the $54 billion New York Gov. George Pataki wants for his state, to the $50 billion in infrastructure spending proposed by Rep. James Oberstar, D-Minn., ranking member of the House transportation committee.

But the historical record shows that increased government spending invariably fails to boost the economy, says a new paper from The Heritage Foundation. In fact, writes Senior Research Fellow Ronald Utt, when federal spending as a share of gross domestic product (GDP) rises, the economy often slows.

Consider what happened during the Great Depression, says Utt, who served as privatization "czar" for President Reagan. From 1930 to 1940, federal spending tripled as new programs were created and old ones expanded in an effort to revive the collapsing economy. Yet GDP had fallen by 27 percent halfway through the decade and barely had recovered all of its losses by 1938. The number of unemployed, meanwhile, more than doubled.

By contrast, Utt notes, the economy reacts favorably when government spending declines. The Kennedy tax cuts, for example, caused inflation-adjusted GDP to grow by 50 percent during the 1960s, a postwar record.

The same holds true in other countries, Utt says. He points to what happened in Japan, where hefty increases in government spending during the 1990s led to a flat economy and a decline in its standard of living. Ireland, on the other hand, cut government spending by large margins over the same time period and saw its standard of living soar.

"It's true we need more spending-but by taxpayers, not by government," Utt says. "If Congress wants to help, it should cut taxes to encourage work, saving and investment."

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