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Why Do Government Expenditures Affect Economic Growth?

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Why Do Government Expenditures Affect Economic Growth?

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In theory the relationship between government expenditures and economic growth is ambiguous. Long ago, Thomas Hobbes (1651) described life without government as “nasty, brutish, and short” and argued that the law and order provided by government was a necessary component of civilized life.4 Taking the Hobbesian view, certain functions of government such as the protection of individuals and their property and the operation of a court system to resolve disputes should enhance economic growth.5 Viewed from another angle, secure property rights, enforcement of contracts and a stable monetary regime provide the foundation for the smooth operation of a market economy. Governments can enhance growth through efficient provision of this infrastructure. In addition, there are a few goods — economists call them “public goods” — that markets may find troublesome to provide because their nature makes it difficult (or costly) to establish a close link between payment for and receipt of such goods.

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