Smaller is better—with one important qualification I address in the bottom half of this post.
Tech Central Station has a good article today, comparing the economic and environmental results achieved by two categories of developed countries: those with “leaner governments” versus those with “larger governments.” The data show that governments with lower taxation rates and lower spending are showing better results.
Not only do the leaner governments show higher total (public + private) healthcare spending and education spending, but they also show higher savings, higher investment, lower inflation, higher wage growth, and lower carbon dioxide emissions per unit of output. Here’s an excerpt from the TCS article Less Is More:
When it comes to government spending, less is more. Less government spending and involvement in the economy—both in terms of regulatory interference and taxation burden—are associated with higher rates of economic growth, better productivity and more diverse markets for products. This is supported by country-specific evidence and several long-running international indices ranking economic environments...
Overall, the study concludes that "It may be surprising, even counter-intuitive, to find that countries with leaner governments spend more on health and education than those with larger governments (and have been growing that expenditure at a faster rate), that they have a better standard of living, better employment records and similar spending on income support...
The lesson is a simple one. If the real objective of European governments is to improve social and personal well-being, they should lower taxes, cut state spending and let the private sector do its job.
It’s more evidence supporting the hypothesis that countries with lower taxation rates and lower government spending rates do better than the larger-government models.
Important qualification regarding “government spending”
To be clear, I do have one not-so-minor nitpick with the way the term “government spending” is typically used in the conservative press. Its implied meaning is that a dollar spent by government is a dollar set ablaze.
That’s not good; it's too broad. It’s ambiguous, it is equivocation, and in my judgment it may well have been a root cause of our major catastrophe five years ago (Sept. 11, 2001).
Adam Smith told us that a government has at least two fundamental duties that cannot be left to the private sector: providing the nation with defense and justice. (He also mentions two more that, in some cases, fit the same criteria: infrastructure and education.)
Let’s consider the first duty of government: defense. Effective national defense requires—no surprise—“government spending.” But in the 1990s, after the Republican-controlled congress kept repeating the mantra calling for reduced “government spending,” the Clinton administration gave them what they’d been asking for, and submitted budgets that delivered—you guessed it—significantly reduced national security spending. Here’s a chart I published a long time ago; it’s worth another look, to illustrate my point. (Click to enlarge.)
I’ll be the first to admit that I cannot prove the negative; i.e., I cannot prove what would have happened had Congress and the President kept defense spending at an even-keel 4½% GDP in the 1990s, instead of reducing it to a fifty-year low of 2.9%. I can only speculate, as follows...
One possibility: It would have been wasted money, spent on the age-old mistake of preparing for the “last war”; not much different from burning the money.
An alternate possibility: It would have been spent on new defenses against new, asymmetric threats, including better intelligence, diplomacy, and preventive military force capabilities—i.e., spent on measures sufficient to thwart the 911 attacks, thereby preventing or mitigating subsequent costly wars.
Two possible outcomes, neither provable—but food for thought as we hear new, oversimplified political cries to “reduce government spending.” For me, it's déjà vu all over again. I keep envisioning what today’s fiscal situation might be, had we refused to sacrifice national security on the false altar of surplus worship in the 1990s.
Try this brain teaser: Which would have been better, starting in the mid 1990s:
(a) Three or four politically popular small-surplus years, followed by six huge-deficit years caused largely by war; or
(b) Ten consecutive years of war prevention through superior intelligence, diplomacy, and appropriate military strength, funded by even-keel annual deficits of a hundred billion or so?
It’s a retrospective daydream I engage in every now and then. In any case, the conservatives' matra should change. The appropriate slogan should be to "reduce nonproductive government spending." That would exempt productive national security spending from the budget ax. Adding the new word would spark a healthy national debate: Are Adam Smith's priorities for government spending still appropriate for today, or are they obsolete?
I think Smith's advice is still good advice, because I think national security is a good investment. And I know for a fact that borrowing money to help fund good investments is sound financial practice. Deficits, invested in the right things, can pay for themselves—in spite of all politial rhetoric to the contrary.
