The Path to Prosperity
In any economic crisis, politicians scramble to "do something" to show voters they’re "on the job." Ironically, the greatest threat to our recovery is not government’s inaction, but rather its actions without regard to its limitations and competencies.
Government can competently perform functions the private sector does not, but it is utterly incompetent when it attempts to manage job creation and the economy. Indeed, stimulating the economy through increased government spending is not only expensive for taxpayers, but also detrimental to their economic well-being.
The evidence in Pennsylvania is overwhelming to those willing to look at it. For years, Republicans and Democrats alike have attempted to spend our state to prosperity without success. In 2004, the House Appropriations Committee—then controlled by Republicans— rolled out some talking points entitled, "Republican Stewardship of State Government: 1995-2003." In addition to highlighting the billions of tax dollars spent on things ranging from agriculture to higher education to the arts and recreation, the chairman boasted that taxpayers "invested $13.7 billion in job-creating economic development."
Yet despite this massive infusion of taxpayer money, our job growth during that eight-year period was 39th in the nation. Apparently, we were supposed to believe it would have been much worse but for the removal of billions of dollars in private-sector wealth from the economy for redistribution to politically chosen projects and corporations.
Governor Rendell’s return on investment of taxpayer dollars is equally dismal. Despite increasing state government spending by more than double the rate of inflation, Pennsylvania’s economic growth lags the national average and ranks among the worst in the nation. Under Rendell (2003-2008), Pennsylvania ranks:
• 33rd in job growth
• 40th in personal income growth
• 43rd in population growth
Despite all the well-meaning economic development programs, Pennsylvania is a prime example that neither Democrats nor Republicans can spend our state to prosperity. Over the years, Pennsylvania has spent more money on so-called economic development than most states. Most recently, we were second (to Ohio) in such spending, and in previous years we’ve been the first.
If spending taxpayer money was the path to economic success, we would be thriving today rather than just surviving.
There is evidence, however, that states’ economies can thrive when their governments recognize they are unable to create jobs by spending taxpayer money. Indeed, states do much better when they rely upon the private sector to make economic decisions rather than politicians.
For example, a Commonwealth Foundation analysis of the 50 states shows that those with the lowest tax burdens and that cut taxes the most had much faster economic growth than states like Pennsylvania with high (and rising) tax burdens. According to the Washington, D.C.-based Tax Foundation, Pennsylvania ranks 11th in state and local tax burden, and sixth in tax burden increase since 2002. Yet, as noted earlier, Pennsylvania ranks near the bottom in income, job, and population growth, despite all of Harrisburg’s "investments" in the economy.
Again, the lesson is that states that left spending and investing decisions to the private sector significantly outperformed those that tried to manage those decisions.
Of course, there are factors other than state government economic development policies that influence economic performance, but the argument simply cannot be made that states which spend more on "economic development" are more successful than those that spend less.
So what should state government do to stimulate our economy? First, elected officials must understand government’s limitations and incompetencies. Politicians should resist the desire to try to manage our economy from Harrisburg with new spending programs. They must recognize that the only way out of our current economic doldrums is through a vibrant private sector that is unhindered by an over-taxing, over-regulating, and over-reaching public sector.
In fact, had Gov. Rendell and the legislature simply held spending growth over the last six years to inflation and population growth (19.8%), Pennsylvania would currently have a $1.2 billion surplus rather than a $2.6 billion deficit this year. Additionally, $15.9 billion could have been returned to the taxpayers—that is more than $5,000 every family of four could have to invest, pay bills, and save for retirement or college tuition.
Rather than raising taxes and spending money to spur economic growth, state government should be cutting taxes and putting spending decisions back into the hands of job creators and workers. This is the path to prosperity.
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Matthew J. Brouillette is president and CEO with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.