Government spending hasn’t delivered for decades, and this time will be no different

President Biden’s speech last night was quite something. For one thing, he spent the entire time speaking as if the federal government isn’t already massively invested in infrastructure, health care, families, veterans, education, and so on and so forth. If it is not, I would like to know where the $5.8 trillion the federal government will spend in FY2021 — up from $4.4 trillion in March 2020 — is. 

I guess it is convenient to ignore that fact, because otherwise someone with a mildly critical mindset might ask why so much spending hasn’t worked yet, and may conclude that it is because the promise that the federal government can really transform people’s lives with a massive amount of spending is misleading.

That would be correct. When you actually read the research of economists on many of these issues, you see a different picture emerge. One that explains why, after trillions of dollars spent annually on these projects, politicians still stand in front of the American people to say that things will be different this time around. They won’t.

Take government spending on infrastructure, which the president touted last night as a source of major future growth and jobs. It is one thing to assume a major return on investment; it is quite another to find such a return when looking at what happens in practice. A recent review of the literature in this NBER paper by economist Gilles Duranton of Wharton University et al. finds “little compelling evidence about transportation infrastructure creating economic growth.”

Looking at spending on highway construction in the Great Recession stimulus bill, economist Valerie A. Ramey, arguably one of the top scholars on this issue, concluded that “there is scant empirical evidence that infrastructure investment, or public investment in general, has a short-run stimulus effect. There are more papers that find negative effects on employment than positive effects on employment.”

Now take federal-government-provided paid family leave. The review of the literature is as brutal as it is for infrastructure. Yes, people like the benefit (most people actually have it already), but it is no free lunch, doesn’t fix the pay gap or other issues, and it creates serious negative effects. Here are just two examples.

Consider Denmark. Its government offers 52 weeks of paid leave and other generous, family-friendly benefits. But even in paradise, there’s no such thing as a free lunch. A well-cited study shows that while men’s and women’s pay grew at roughly the same rates before they had kids, mothers saw their earnings rapidly reduced by nearly 30% on average; men’s earnings were fine. Women might also become less likely to work, and if still employed, earn lower wages and work fewer hours. Women are also seriously underrepresented in managerial positions.

Some people argue that paid leave is only one side of the equation: In order to get the full benefit of paid leave, the government needs to subsidize childcare, too. This is incorrect. A recent paper looking at 50 years of data from Austria shows that the generous expansion of paid leave benefits, even when coupled with generous childcare benefits, “have had virtually no impact on gender convergence.” In other words, those claiming that the benefits are necessary to close any real or imaginary gender gaps in the workplace should find another way.

Government paid-leave programs are also ineffective at reaching the low-income families that legislators claim to have covered. As a result of these factors, many programs in the U.S. and in other countries have struggled to meet lower-income workers’ and families’ needs, even as they have grown in size and scope:

California. In California, 38 percent of the workforce has wages below $20,000, and yet only 1 percent of those low-wage workers use the state’s paid family leave program. Workers in the highest income bracket (above $84,000) were five times more likely to file paid family leave claims with the state as those in the lowest income bracket (below $12,000). Even in San Francisco, which has its own paid family leave law that provides 100 percent benefits to new mothers, low-income mothers (below $32,000) were only half as likely as higher-income mothers (above $97,000) to receive paid family leave benefits from the government.

Canada. Government paid family leave programs have exacerbated class inequality: Despite proportionate and obligatory contributions of all employers and employees to these programs, the distribution of benefits is unbalanced and aids the social reproduction of higher-income families, especially outside of Québec. While Quebec, which operates its own program, has taken action to increase government benefits, they are still not equally used by mothers with lower socio-economic status.

Norway. In Norway, which expanded paid leave to 100 percent replacement rates for nearly all mothers, researchers found that paid maternity leave has negative redistribution properties, and that the extra leave benefits amounted to a pure leisure transfer, primarily to middle and upper income families. The researchers concluded that the generous extensions to paid leave were costly, had no measurable effect on outcomes and [also had] poor redistribution properties.

We could do this for every single handout that the president wants to give in his gigantic bills. The bottom line is we should take the promise of growth, job creation, and bliss with a grain of salt. Don’t get fooled. Government spending hasn’t delivered for decades, and this time will be no different.

Post a Comment

Previous Post Next Post