Economic Growth and the Public Sector: Evidence from the States

September 7, 2006

Can we grow our economy by limiting public spending? The Ohio legislature passed a state spending limitation in May 2006 on the theory that we could. Economic Growth and the Public Sector: Evidence from the States, by Columbus researcher Jon Honeck, sheds serious doubt on the idea. The report finds no evidence that states with relatively large public sectors had slower private sector growth. In fact, higher rates of public sector growth were associated with more rapid economic growth.

The study found that states with a higher share of Gross State Product in state and local government had better private economic growth than other states between 1990 and 1997, and performed equally well between 1997 and 2004. Increased public sector GSP was also associated with increases in economic growth. While we wouldn’t argue that enlarging government causes private economic growth, these findings make clear that it doesn’t stand in the way.

Ohio will not receive economic rewards for arbitrarily restraining its public sector, nor will our economy be punished if the state budget exceeds the artificial 3.5 percent limit. Cutting essential public services will not stimulate economic growth. Policy debates should not imply a tradeoff between private sector economic performance and public goods like education, transportation, health care, and law enforcement. We can, and should, demand a society that provides both.

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