PART ONE--
This is an incredibly complex issue to answer. Let me start with some basics:
Indeed, a larger US government sector will result in a smaller number of employed persons. Many very sophisticated, highly regarded economic studies have concluded this to be the case.
One simple case study is a comparison of the US and Europe (the European Union=EU):
In 2004 (a representative year), US government spending amounted to 36 percent of the total economy compared to 48 percent of the EU's economy. The unemployment rate in the US was 5.5 percent compared to a rate of 8.5 percent for the EU. A US umemployment rate of 8.5 percent would have meant that there would have been about 5 million fewer employed persons in the US that year.
In addition, from 1995 to 2005, the US economy expanded at an average rate of 3.2 percent, compared to a rate of 2.1 percent for the EU. Without exception, economic growth generates proportional job growth. Thus, a large government sector means declining job opportunities over time.
More to come...
Prof Rajan of the University of Chicago cites the lack of a real safety net in the US as a contributing factor to the current crisis (and as a source of tension for future faultlines). According to his argument, middle and lower class angst about stagnant wages led to political support from BOTH sides to increase credit in order to maintain consumption.
ReplyDeleteYou can see more in his interview here: http://www.uchicago.edu/features/20101115_rajan.shtml
Additionally, in China you see a savings rate of 30-50% for households as the lack of a safety net, especially in regards to medical care, forces families to save for low probability/high cost emergencies. As a result, we're not seeing the needed domestic consumption in China to offset America's load as the world's principal consumer.
Obviously too generous a safety net retards incentives, but neither can a society fully develop if the majority of its people are too worried to take chances.
David your right this is a complex issue, and yes some tax dollars do generate private sector jobs, however when money is spent to generate government jobs or redistribution of wealth, then this does take away jobs and growth from the private sector.....
ReplyDeleteThank you for your comments.
ReplyDeleteFor a great review of Prof Rajan's book, go to the Cato Institute website (cato.org). The Professors comments on a "safety net" are a bit outside his area of expertise and don't hold up well.
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