Economics

How Government Spending Harms Private Investment

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Writing at Investors Business Daily, Independent Institute economist Robert Higgs argues that government intervention in the economy is strangling private sector investment:

The current investment drought does not simply reflect the housing bust that followed the residential investment boom that peaked in 2005. To be sure, real residential investment fell tremendously, by almost 53% from 2005 to 2009, with especially rapid declines the past three years. Yet real nonresidential investment also fell greatly last year, by 18% from its 2008 peak.

Even real investment in equipment and software — a category only loosely connected to the housing boom and bust — declined last year by 17% after occupying a high plateau during the preceding three years. Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government's "contribution" to GDP — increased by over 13% in constant dollars.

Unfortunately, while private investment is the engine of economic growth, government spending (despite what generations of Keynesian economists have asserted) is the brake. To understand this negative relationship, we need only scrutinize how the federal government's spending is determined: namely, by political processes devoid of economic rationality.

In this light, we can appreciate that enhanced government spending does not bulk up the economy, nor merely crowd out worthwhile private activity. Instead, it undercuts, penalizes and distorts everything that private parties attempt to do to create wealth. Ham-fisted government regulations and additional taxes are known killers of economic growth.

Read the whole thing here. And click below to watch Higgs and Reason.tv's Nick Gillespie discuss the decline of classical liberalism in America.