But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:
In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”
Here are some key findings.
We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).
Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.
This is contra everything that is ever taught about GDP in mainstream economics.
TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.
And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.