There's No “Lost” Economic Growth During Government Shutdowns

Some are convinced that government spending is a substantial driver of U.S. economic vitality. Nothing could be further from the truth.

According to Congressional Budget Office (CBO) data, the federal government spent $3.9 trillion in 2017. In Argentina, total federal spending in 2017 was $161 billion.

The above statistical disparity rates mention in consideration of all the hand-wringing related to the partial federal government shutdown in the U.S. Supposedly, an elongated one would slam the brakes on the U.S. economic expansion. No less than J.P. Morgan CEO Jamie Dimon observed this week that a prolonged shuttering of one quarter of the federal government could “reduce growth to zero.”

Dimon would be wise to relax. So would others convinced that government spending is a substantial driver of U.S. economic vitality. Nothing could be further from the truth.

Private Sector Proportions

Implicit in what’s wholly false is that Argentina’s economy is a fraction of the U.S.’s simply because its politicians are quite a bit more parsimonious than are the members of Congress. Such a view isn’t serious, but it’s a reminder of just how much statistics can obscure reality.

Simply put, Argentina’s federal spending is a fraction of U.S. federal spending precisely because its economic output is a fraction of what takes place stateside. Just the same, federal spending in the U.S. dwarfs that of other countries precisely because the U.S. economy is quite a bit larger than other countries' economies.

Governments only have money to spend insofar as the private sector in countries produces wealth for them to spend. Congress was able to spend $4.1 trillion (according to CBO data) in 2018 because American output is many multiples of $4.1 trillion.

Figure that if there were a permanent cessation of a quarter of federal activity, the result would be trillions worth of extra resources for private actors to put to work.

Governments can’t stimulate economic growth with spending; rather, their spending is only possible because of economic growth. Applied to the partial shutdown of the federal government, what limits government spending logically cannot limit economic growth. Figure that if there were a permanent cessation of a quarter of federal activity, the result would be trillions worth of extra resources for private actors to put to work.

Readers might think about the above for a moment. When our federal government spends, it means that Nancy Pelosi, Mitch McConnell, and Donald Trump are playing a substantial role in the allocation of trillions worth of wealth first created in the private sector. On the other hand, when fewer dollars flow to Washington, it happily means that people like Jeff Bezos, Peter Thiel, and Travis Kalanick have more in the way of resources to experiment with. Yet defenders of the big government status quo persist.

Economic Measures

In a client report written last week, Regions Bank chief economist Richard Moody lamented that the partial shutdown would disrupt the “flow of economic data” at a “most inopportune time given increased uncertainty about over the course of the U.S. economy.” Moody unwittingly makes the case for a more permanent shutdown.

There is a market demand for reliable employment data, and the market is providing it.

Lest he forgets, arguably the most scrutinized of all economic statistics produced by the federal government is the one that measures the rate of unemployment in the U.S. Yet too often unsaid here is how totally unnecessary the report is. The Bureau of Labor Statistics (BLS) employs 2,500 people at a cost of $640 million annually to produce its monthly unemployment report. Each month, meanwhile, the private company ADP releases a report two days ahead of the BLS's that nearly mimics the BLS's, all at no expense to the taxpayer. There is a market demand for reliable employment data, and the market is providing it. What works for unemployment can logically work for any other statistic that economists claim to be necessary for them to do their jobs. If it’s necessary, private actors can do it without burdening every American with the cost.

Life Goes On

The point of all this is that true believers in limited government would be wise to not let this partial government shutdown go to waste. Instead, proponents of a shrunken federal footprint should seriously address whether or not many people in a country populated by over 300 million have actually noticed a difference in their lives in the past few weeks.  

Indeed, arguably the most vivid lesson of the shutdown is being overlooked. Eight-hundred thousand furloughed federal employees, and what, exactly, is the noticeable harm? The media trumpet the federal employees’ missed paychecks and niche difficulties faced by the citizenry (economists and financial types lacking economic data, for instance), but what goes unreported is that for 95 percent of the population, life goes on essentially unaffected in any material way. What better evidence that our government spending is mostly waste and make-work?

Alarmists will continue to promote false notions about the “lost” economic growth that will result, reality will continue to intrude on what’s not serious.

So while alarmists will continue to promote false notions about the “lost” economic growth that will result from the political class wasting fewer dollars, reality will continue to intrude on what’s not serious as most get on with their lives properly indifferent to what at least temporarily limits the activities of one quarter of our federal behemoth.

Which brings up a challenge that is also an opportunity. What hasn’t affected voters after three weeks will similarly not affect them after three years. If Republicans really want to prove how unnecessary our $4 trillion federal government is, they should keep it shut down through 2021. The economy will boom in the interim thanks to a shrunken federal burden, and a long-term point will have been made about the good of shrinking Leviathan to all of our betterment.

This article was reprinted from RealClearMarkets. 

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