CBO Says Federal ‘Investment’ Doesn’t Create Economic Growth

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Now that Obama has proposed what purport to be cuts in the “defense” realm, the pro-military spending voices have become much louder. Articles are appearing in the main stream media claiming that “defense cuts may harm innovation,” like this one. However, the government itself has documented that this is not so, even though this knowledge did not deter it from vastly increasing its spending after the study was made. This only proves how irrational this government is (from the perspective of the general public).

In June of 1998, the Congressional Budget Office released a study of the effects of federal spending on economic growth. Some of its conclusions follow:

1. “This paper concludes that additional federal investment spending is unlikely to have a perceptible effect on economic growth.”

2. “Many federal investment projects yield net economic benefits that are small, or even negative. Others yield high returns that would be forgone in the absence of federal involvement, but the number of such projects appears to be limited, and hence their potential impact on growth is small. Increases in federal investment spending that are not targeted toward cost-beneficial projects can reduce growth.”

3. “Federal investment spending can displace investments by state and local governments and the private sector. Displacement is likely to be substantial in some cases, such as roads and bridges, which state and local governments have a strong incentive to fund because the benefits accrue primarily to local users. Federal spending that displaces other investment is unlikely to have a positive effect on growth.”

4. “Many federal investments are motivated primarily by noneconomic policy goals (such as equality of opportunity, national security, and the advance of scientific knowledge). Others are influenced by political considerations. For those reasons, one cannot expect that federal funds will always be directed toward the most cost-beneficial use, even within those classes of projects that have an economic rationale.”

5. “…on balance, the available studies do not support the claim that increases in federal infrastructure spending would increase economic growth. ”

6. “Although overall investments in education and training contributed substantially to past increases in the productivity of the U.S. workforce, and hence to economic growth, it is not clear that increases in spending on those activities by the federal government would lead to additional growth. Many of the federal education and training initiatives target social goals, such as educational opportunity, rather than workforce productivity. Programs that focus more on economic gains have met with only limited success, and expanding them would offer little assurance of positive economic returns. ”

7. “First, most federal R&D is mission-oriented and typically cannot be justified by its economic return. Instead, it should be judged on its contribution to the federal mission in question (for example, national defense).”

8. “This paper finds that increased federal spending on investment in infrastructure, education and training, and R&D is unlikely to have a perceptible positive effect on economic growth.”

9. “Based on the available literature on the economic value of federal investments, CBO finds little ground for optimism about the effects of increased federal spending.”

10. “In short, the federal government’s opportunities for making investments that yield economic benefits are limited.”

Of course, we have every reason to believe beforehand, from both theory and evidence, that federal government spending not only does not promote economic growth, it retards it. There are also good reasons to believe that past studies have over-estimated the benefits of federal spending, such as by using discount rates for financing that have been too low and not accounting properly for the diversion of funds from free-market uses.

But even restricting ourselves to the realm of empirical measurement, the government’s own study directly counters the kinds of pro-defense spending puff pieces now appearing in the press. The latter are obviously planted by sources heavily biased toward big government. In fact, it is a marvel to behold how quickly these pro-defense articles have been produced, how deeply the mainstream reporters are imbued with a big government bias,  and how these stories trot out all the old myths and lies about how defense spending has given us the internet and other gadgets.

Let it not be said that rationality ever prevails in the political arena. Despite the knowledge that increased federal spending does not improve economic growth, successive Republican and Democrat governments have vastly increased the government’s size and intrusiveness. Their agenda is obviously not growth.

The Washington Post has a somewhat different story. It thinks that defense cuts can’t be done because of “the unending need to protect allies and the flow of oil.” And it also doubts that the government can or will wind down operations that require a big footprint overseas. It writes

“…the judgment that such operations can be ruled out for the next decade strikes us as at odds with the reality of a Middle East in revolution, an increasingly belligerent Iran and a North Korea undergoing an unpredictable leadership transition — to name just the most obvious threats. Afghanistan itself is due to be the site of U.S. counterinsurgency operations until 2014, and tens of thousands of troops will remain for many years afterward if a pending deal with the Afghan government is completed.”

The Post’s neoconservative assumption is that the U.S. government must continue to leech upon productive Americans in order to intervene in trouble spots all over the world and that “defense” spending will and should remain high, this being a “reality.” But why is this so? Must this be the reality? Of course not. The U.S. government could, if it wanted to, reduce these interventions and eliminate them.

Obama is proposing some sort of a change in the government’s production function of intervention, not a reduction or an elimination; and the Post is taking issue with its feasibility. But both are committed to U.S. global hegemony and dominance hung on the backs of working Americans. Both advocate a U.S. empire financed by taxpaying Americans. Both have a messianic and self-contradictory vision of a world order of peace and democracy imposed through endless war and violence.

We can see already the immense failures of this vision in Iraq, Afghanistan, and Libya. When the U.S. has destroyed the existing political setups, long-term warfare and instability emerge. Certainly no American-style democracies emerge, and if they did, would that necessarily be a good thing? Would that be the be-all and end-all? Our own problems hardly suggest that we have found the ultimate form of government.

Enough is enough.

8:39 am on January 7, 2012