Federal Spending is Hurting the States

A new study by Arduin, Laffer & Moore Econometrics published by the Texas Public Policy Foundation nails the problems we are facing with increased federal spending:

Every dollar the [federal] government spends must first be removed from the pocket of the private sector—through higher taxes today, or higher borrowing today implying higher taxes tomorrow. Either way, government spending crowds out private sector spending, diminishing the private economy’s rate of growth. In other words, increased government spending makes citizens poorer because it takes their money now while reducing their future income. This fact is at the heart of the debate about whether or not Texas should accept federal stimulus money.

The study finds that:

…the costs of accepting federal dollars from the ARRA [American Recovery & Reinvestment Act] will be a long-term drain on the private sector. The ARRA Act of 2009 will increase the government expenditure wedge from 49.16% to 52.41% for an overall 3.25% increase. This increase will reduce the growth in real net business output by 2.5%, which translates to a reduction of 1.7 million jobs nationally.

Read the whole study here.

Obviously the study has to assume certain economic growth metrics in building models to assess the data. Thus the number 1.7 million jobs lost as a result of ARRA spending is not a hard number. But neither are the projected 3.5 million jobs saved or created by the stimulus as claimed by the White House (believe it or not they have estimated numbers for every congressional district). Since the projected created jobs are largely short-term construction projects, they will eventually return to unemployment. It is quite likely that, baring any mitigating factors such as tax and spending decreases, we could see a 1.7 million job loss over the next few years directly resulting from ARRA and other spending.