, Volume 69, Issue 2, pp 153-173

Productivity in the United States and its relationship to government activity: An analysis of 57 years, 1929–1986

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Abstract

Under the classical supply-side paradigm of productivity grouth, raising government economic above rudimentary levels integrates markets and provides useful public goods which enhance growth. Beyond some point however, increasing government activity discourages growth through tax disincentives and by rewarding dependence on government expenditures. Defining government economic activity to be government expenditures as a percentage of GNP, this study looks first at data for the period 1889–1986 and shows that the U.S. economy has experienced what is predicted by the supply-side paradigm. In addition, the study presents an econometric analysis of government's effects on productivity for the period 1929–1986 using a standard neoclassical growth model. This analysis validates the classical supply-side paradigm and shows that maximum productivity growth occurs when government expenditures represent about 20% of GNP, far less than the 35% which existed in 1986.

I wish to thank Tom Hall and Michael D. Bradley for their comments on this paper. Their willingness to dig into the material and subsequent suggestions were very helpful in producing this document. Thanks also, to my wife, Carmen García, who helped me prepare the manuscript.