Government spending and economic growth

For those not familiar with the work of Robert Higgs, the most recent Reason Magazine provides both a nice application of his fine work in economic history as well as a very timely set of argumentation presented in an accessible manner for interested citizens who are reflecting on some rather important changes in the scale and scope of federal government activity in American society.

In talking about the role of the government in society and the impact of that government involvement on economic growth and standards of living, Sidney Richmond looks again at the widely held belief that WW 2 spending lifted the US out of the great depression:

Their bottom line: "Whatever the war's effects on seemingly booming conventional macroeconomic aggregates, it entailed a retrogression in the average American's living standards, and that disconnect should alert us to those aggregates' limitations."

Keep this in mind the next time a politician or pundit exhorts you to support more government spending in order to restore prosperity. Rising living standards comes from saving, entrepreneurship, and innovation—in a word,freedom—not politicians' self-indulgent schemes with your money.

See previous post for link to full Reason Article.

An update of the Higgs analysis of WW2 and the impact of expansive government spending is, a must read for high school social studies teachers as well as a cautionary note on interpretation of aggregates:The debate over World War II’s role in ending the Great Depression has enormous relevance in connection with the current anemic recovery from the Great Recession.

We have offered evidence to support Robert Higgs’s argument that the wartime macroeconomic data significantly overstated the degree of genuine economic recovery. Higgs’s evidence rests on his reinterpretation of several traditional macroeconomic indicators to compensate for the distinct features of a wartime economy. We show that if one digs below the aggregates and looks at how American households lived during the war, as shown in the media, letters, and journals, Higgs’s case appears to be even stronger. Whatever the war’s effects on seemingly booming conventional macroeconomic aggregates, it entailed a retrogression in the average American’s living standards, and that disconnect should alert us to those aggregates’ limitations.

Whenever government commands resources, those who finance this acquisition, whether through taxation or purchase of government bonds, incur opportunity costs. Whether the diverted resources go toward building tanks and guns or toward repairing bridges and roads does not alter this fact. As we continue to debate the effectiveness of large-scale government expenditure to speed recovery from the Great Recession, we should not be looking at the wartime experience of the 1940s as a guide.

http://www.independent.org/pdf/tir/tir_17_03_01_horwitz.pdf