A new report by the Texas Public Policy Foundation (written in part by supply-side economics guru Arthur Laffer) has concluded that instead of stimulating the economy and creating jobs, the massive increases in federal spending will actually hinder private sector job growth and could cost the state of Texas anywhere from 131,400 to 171,900 jobs.
Increasing federal spending does not stimulate the economy. Just the opposite: higher government spending crowds out the private economy, diminishing its rate of growth. The driving force of the economy is the incentive to engage in market activities. In both the long and short run, individuals and groups of individuals allocate resources according to the after-tax rate of return. If market activities are profitable, the economy will concentrate on ever-increasing market successes. When the profitability of market activities is reduced, market activity diminishes and welfare enhancing activities cease. …
The ARRA [American Recovery and Reinvestment Act] is a significant increase in federal government expenditures at a time when the private sector can least afford to pay for the higher government burden. As a result, the purported “stimulus” plan passed by Congress and signed by President Barack Obama will actually worsen the economy’s performance.
The report estimates that nationally, the ARRA will increase government expenditures 3.3 percent while reducing real net business output by 2.5 percent.
As for Texas:
The ultimate impact from the ARRA of 2009 on Texas will depend upon how the state manages the increased federal government money. The previous section established the deleterious impact that a high or growing government expenditure wedge has on the private economy’s growth rate. Spending the money on recurring programs will necessitate Texas to increase taxes in the future in order to maintain these programs once the federal government funds run out, locking-in the higher expenditure wedge.
Maintaining the higher government expenditure wedge will reduce the annual average growth rate in the private sector by 0.32% per year. Over a 10-year period, Texas’ economy will be up to 3.22% smaller than it would have been had the extra spending been focused on one-time projects only—rejecting all funds that would ultimate lead to a permanent increase in the government spending burden. In terms of employment, this equates to the approximately 170,000 jobs that will not be created due to the additional government expenditure burden being maintained.
The conclusions of the report appear to back up Governor Perry’s insistence that federal stimulus funds be used for one-time expenses only instead of being incorporated into the budgets of ongoing programs. It also clearly echoes the supply-side arguments made famous by Dr. Laffer: namely that lower tax rates provide greater incentives for innovation and business growth, which in turn creates more private sector jobs.
Previously:
Is it hypocritical for Perry to accept stimulus money?
