COLUMBUS, Ohio -- With the exception of money devoted to education, most spending by state governments has little effect on stimulating the private economy, according to a recent study.
Economists examined spending by the 48 mainland states on education, highways, health and hospital services, police and fire, and sewer and sanitation services during a 16-year period of 1970 to 1986.
They then calculated the effect this spending had on each state's gross state product -- the total measure of private economic output. Results showed that only education spending resulted in measurable economic growth.
"The results suggest that massive government spending is not the way for economic salvation in the states," said Paul Evans, co-author of the study and professor of economics at Ohio State University.
"We think that private spending may in many cases be more productive for the economy than spending more tax dollars."
Evans conducted the study with Georgios Karras of the University of Illinois at Chicago. Their results were published
in a recent issue of The Review of Economics and Statistics .
The study did not consider federal spending because the effects would be too complex to calculate for the entire nation within an acceptable rate of error, Evans explained.
The positive effect of education spending on the economy was more than just a salary effect, Evans said. In other words, it wasn't simply the result of the fact that more highly educated people earn more and thus have more money to spend.
"Spending on education makes people more productive and this leads to higher levels of output in the state," Evans said. "That's why we think education spending helps."
In theory, other forms of state spending can stimulate the private economy in several ways, according to Evans. For one, workers are hired to build highways and to run state agencies. And a new highway, for example, may make firms that use it more productive and profitable, boosting their earnings.
But more spending on these services isn't always better, he said. Obviously, states need a certain amount of highways, sewers, and police and fire protection. But at some point, for example, a state doesn't need new highways and any more that are built won't make the state's workers more productive.
"In many cases, it may be more economically beneficial to improve the efficiency of current government activities than to provide more of them," he said.
Evans noted that governments don't spend money just for economic reasons; a new highway or park may improve the quality of life for citizens without stimulating the economy. But policymakers should consider whether money spent on a particular project will return as much value to citizens as it would if spent in the private sector.
"The old idea that you could spend yourself rich has been proven false. It certainly wouldn't be appropriate for a state or local government to think all they had to do was spend money in order to help the economy."
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Contact: Paul Evans, (614) 292-0072
Written by Jeff Grabmeier, (614) 292-8457