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Tax Myth Debunked: Gov't Spending Stimulates the Economy During Recessions
Posted by Todd Davidson on Wednesday, February 06, 2013
Tax Myths Debunked, a rigorous study by economists Dr. Randall Pozdena and Dr. Eric Fruits, was published by the American Legislative Exchange Council (ALEC) today.  The report takes a deep theoretical and empirical dive into both state and national tax policy debunking several myths along the way.

Myth number one is the notion that “increased government spending stimulates the economy during recessions.”  Messrs Pozdena and Fruits review the academic literature in order to debunk this common myth.  At the national level they find:

A large and long-standing body of literature finds that increased or higher government spending tends to reduce economic growth rather than increase it. This negative relationship between prior levels of high spending and growth is apparent in the data from developed nations (See Figure 3). 

Looking at the state level a similar conclusion is found; higher government spending correlates with slower economic growth:

Studies comparing the growth rates of various states with different levels of public sector spending also fail to identify consistent evidence that demonstrates how public spending increases a state’s rate of economic growth. This is particularly the case when the spending is on transfer payments, but it is ambiguous even when spending is on more productive items, such as education, health and infrastructure. 

Figure 4 shows that states that have a history of high rates of total government spending growth (per dollar of Gross State Product [GSP]) subsequently display much lower rates of GDP growth. This is suggestive of a causal relationship between fiscal profligacy and subsequent slow growth.
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