A considerable volume of cross-country analysis has found no positive impact on economic growth from more government spending. Many studies (see here and here, for example) find that government spending actually hurts growth. A recent study by The Heritage Foundation and The Wall Street Journal of economic recovery following the 2008 financial crisis has also found countries with bigger governments growing more slowly.
Would such adverse effects of spending on growth also be the case in our 50 states? An empirical study published in the journal Public Choice reported evidence that states with larger public sectors tend to have lower economic growth rates. Furthermore, the study found that the negative impact of government spending on growth is considerably larger at the margin. A quick analysis of more recent years’ economic data for the 50 states validates these findings.
As shown in the chart, on average, states that spent a higher portion of their economy on government programs over the last decade had lower rates of economic growth.
Reining in mounting government spending was a central theme in last November’s election. It’s quite clear that spending restraint is important both nationally and at the state level. A little healthy competition in cutting budgets among our 50 states may be some of the best medicine for restoring the overall health of our economy.