WITH the second-quarter gross domestic product growth coming in lower than everyone had hoped for, the full-year forecast of 7 percent to 8 percent, in the words of Senate President Franklin M. Drilon, is a “pipe dream.”
Drilon voiced his opinion that the nation’s economic growth is being dragged down by an “alarming” trend of government underspending. He points out that government spending represents nearly 20 percent of the nation’s economic output.
However, we would caution that, paraphrasing American psychologist Abraham Maslow, “If all you have is a hammer, everything looks like a nail.”
Those in the government appear to believe that the only tool they have is the hammer of government spending because that is what they are directly in charge of. In other words, as American philosopher Abraham Kaplan wrote, “Give a small boy a hammer, and he will find that everything he encounters needs pounding.”
What is missing in the conversation about government spending is the fact that the bulk of that spending is for ordinary expenses, like salaries of government employees. If government spending was the best solution to increasing economic growth, then doubling the salaries of the military, police and teachers would be the answer.
Conventional economic wisdom would say that increasing salaries of employees without an increase in productivity would not be cost-effective. However, the government is not expected to create a profit and, in fact, doubling salaries would have a positive impact on the economy even if it meant more government borrowing to pay for it.
But that salary increase would not be politically acceptable and, therefore, will not happen.
The greater question though, is, does economic growth follow increases in government spending? The men and women holding the hammers would like us to believe that it does. The facts may show something different.
If you look at the actual growth—not the growth rate—of the nation’s economic output, the correlation is not with government expenditures but with capital formation.
Government spending was lower in 2010, even as the economy did well, and the correlation is with capital spending for equipment, buildings, machinery and the like. Capital formation boomed in 2013, as did the economy, in spite of lower government spending. Total government spending was never any higher than in the first quarter of 2015, yet economic growth turned lower as capital formation decreased substantially.
Yes, the government needs to do its part in capital formation by better and increased infrastructure spending. That is the job of the hammer. But most of the economy’s capital formation comes from the private sector. Using another tool to make private-sector investments easier, more cost-effective and faster is what is really needed.
Image credits: Jimbo Albano