In a new study published by the Club for Growth Foundation, Dan Mitchell and Robert O’Quinn assess the macro-economic effects of President’s Biden’s “Build Back Better” agenda to expand the welfare state.
Their study summarizes a lot of scholarly academic research on the negative relationship between the size of government and economic growth. They also look at studies published by establishment organizations such as the International Monetary Fund (IMF), World Bank, Organization for Economic Cooperation and Development (OECD), and the European Central Bank (ECB) to further document the negative effects of higher government spending on economic growth.
The authors apply a recent CBO study showing that ten-percentage-point increase in government spending as a percent of GDP would reduce real GDP growth rate by 1.1 percent per year. They then apply those findings to Biden’s proposal, which the Committee for a Responsible Federal Budget estimates — once budget gimmicks are eliminated — would cost $5.48 trillion instead of $3.5 trillion over ten years.
What did they find?
Based on this analysis, Mitchell and O’Quinn find that the GDP growth rate will be 0.2 percentage points lower over the next ten years if Biden’s plan is approved. That would reduce GDP by $3 trillion over ten years and reduce total compensation for workers by $1.6 trillion over ten years. The long-run consequences would be particularly severe for younger people, who would suffer a 4 percent drop in lifetime consumption.
People can argue with the exact numbers but directionally this seems correct. Here is a good summary of the paper.