Does Bigger Government Equal a Weaker Economy?
Since the pandemic erupted onto the scene back in 2020 government spending has again been on the rise, and so has their role in our day to day lives. The Federal Reserve (the Fed) is starting to reduce its holding of mortgages and Treasury securities. The Fed grew the money supply in 2020 by 26 percent, in 2021 they grew it by five percent. We are starting to experience the effects of this inflation.
With mounting regulatory burdens, higher taxes, out of control government spending, and all the new mandates, the government seems to have become the leading lady in our own individual stories. There are those that are determined to push Washington back to its pre-pandemic role. “Government, to me, should be in a supporting role, not a leading role; a watchdog, not a cow to be milked,” said Sen. John Barrasso (R-Wyo.). “The goal is to help people get back on their feet but not to make this the new normal.”
A survey done by Gallup in 2021 found that more and more Americans have shifted back to favoring a less-interfering approach when the government is addressing the nation’s problems.
In another survey Gallup found that at least half of Americans since 2005 have said that the government has too much power, peaking at 60% in 2013 and 2015.
So what does this all mean for our economy? There have been many academic studies which have shown an inverse relationship between the size of government and economic growth. For example, the economy of the U.S. used to grow at an annual rate of 3%, but the average rate has dropped to 2% in the last two decades, while government’s spending has increased. Since the terrorist attacks in 2001 big government got even bigger and has continued to enlarge its role ever since.
Government spending has increased from 35 percent to nearly 44 percent of the GDP over the last 25 years. While the National Debt has grown to 128.1 percent of GDP. Milton Friedman once said, “The thing you should keep your eye on is what government spends, because that’s the true tax.”
In other words, if the government is spending half of what our country is producing, that’s half the money out of our pockets, which leaves us only half free. In the big picture, it's not always the deficit that is the critical variable, the key thing to note is how the government is financed. The government is clearly taking on more debt than is logical in any circumstance.
A healthy economy does need some government to enforce appropriate regulations, but where is the line? How much is too much? Most economists would agree that there are always circumstances when higher levels of government spending would have a positive impact. More often than not, real economic growth happens with less government interference, and more freedom to the people, and business owners.
There is always a price to be paid when government spending gets out of control. That price is paid out of the pockets of the citizens and the economy slows down. According to The Heritage Foundation, there is overwhelming evidence that shows when government spending is too high, America’s economy slows.
Growth happens when we the people, and businesses, keep more of our income. That is why tax planning is so important. The more you are able to keep, save, invest, and spend yourself, the more the economy grows!
For example, in a business sense, if a business saves 10 percent in taxes, on $1.0 million in profit, that extra $100,000 could be used to pay for additional growth opportunities, hiring employees or increasing wages, new machinery, or other opportunities to help the business thrive.
A healthy economy, generally grows north of three percent, less than that and it is more of an anemic economy. Our current economy is anemic! We need less government, so we can grow and prosper. How we achieve this, I am not sure, as it seems most of our elected officials continue to vote against the people. With all that is happening, perhaps the best thing we can do is hold our elected servants responsible for the job they are doing, and remember to save first and spend what is left over!