State and Prosperity
The strong global recession, caused by the containment measures imposed by the Covid-19 outbreak, as well as the aid granted by many countries to people and companies, has led to increased budget spending and public debt all over the world. This phenomenon has been added to the expansionary monetary policy of central banks, which in many cases has gone as far as monetary financing of a large part of public debt, which has led to the rise of inflation. In addition, the “relaunch” measures and the economic consequences of the war in Ukraine have led to the increase and intensification of the state’s intervention in economic activity and the continuous weakening of the market economy, on whose proper functioning depends on the well-being reached by a part of the world at the beginning of this third millennium.
Although many economists have grasped the danger of rising public spending, they disagree on the significance of the results of the analysis of the relationship between this phenomenon and welfare: Keynesian-inspired economists continue to assert that public spending is likely to “stimulate” demand and economic growth. And even economists who do not share this “extreme” statist view tend to argue that the destination of expenses is more important than their size. The qualitative aspect of public spending cannot be ignored: there are, indeed, important differences between the increase in unproductive expenditure, such as those involved in the maintenance of the bureaucratic apparatus, or the mere redistribution of income in the name of the “social state”, on the one hand, and infrastructure investments, seriously designed and well executed, on the other. However, it is no less true that sustained economic growth cannot be achieved under the conditions of the existence of an oversized state sector: empirical analyses of the relationship between state size and well-being, carried out over a long period of time and covering a large number of countries, clearly show that there is a reverse link between the size of the state sector and prosperity. And this conclusion also applies to state expenditure which is usually considered “productive”, such as education, research, infrastructure, etc., if the tax costs involved in the state’s action in those areas are taken into account.
- Results of empirical research
Empirical studies show that, in the short term, a country’s economic growth is influenced by a very large number of factors. A country may also have particular conditions related to various economic policies, such as, for example, monetary policy or currency regime, which are generally difficult to isolate from other forms of state intervention in the economy. Therefore, relevant conclusions in this regard can only be drawn by observing a number of representative countries and for a long time. Numerous empirical works of this kind clearly confirm the inverse relationship between the size of the state and welfare.
State intervention certainly does not prevent the economy from developing, but economic growth is at best mediocre, leading, in addition to lower incomes, to higher unemployment and lower life expectancy.
More specifically, the entire experience gained so far in the world shows that the increase in state intervention in the economy causes, in the long term, the economic development to slow down. During this period, the negative impact can be very strong. Once the fiscal burden stabilizes, the economy becomes more resilient, but it grows even more slowly. The explanation lies in the fact that the tax burden imposed by state maintenance and intervention leads to the systematic reduction of economic efficiency, investment and innovation, which are the real forces of economic growth.
It cannot be said, however, that the relationship mentioned is linear, which would mean that a state budget in which revenues and expenditures are zero is the most favourable for economic growth. However, even if it is admitted that, up to a certain point, the state has a positive role, especially in terms of the protection of property rights, the administration of justice, ensuring the security of citizens and the creation of infrastructure, it is doubtful that if the functions and size of the state exceed a certain critical threshold, the impact of state activism is rapidly reflected in the slowdown in economic progress.
This finding also applies to areas where state expenditure is usually considered “productive”, such as, for example, education, research and infrastructure creation. For there can be empirically no positive effect on the welfare of state expenditure in the above-mentioned areas or in others of the same kind. The contrary assertion ignores the negative impact, which may be evidenced by empirical analysis, of the tax burden imposed by the replacement of the private sector by the state, the latter's taking of the resources it needs and spending them in accordance with the objectives of the power holders and with a system of incentives that is generally less efficient. Hence the counterproductive effect of various categories of public expenditure: subsidies, aid, premiums, tax exemptions, regional policy expenditure and, in general, economic development planning.
The negative but non-monotonous relationship between the burden of state maintenance and prosperity is expressed by the “Rahn curve”. This economist reflected deeply on the issue of the “optimal” dimension of the state, concluding that public spending has a discouraging effect on efforts to produce goods and services. In his view, the optimal size of the state is between insufficiency, in the sense that the state cannot perform its essential functions of protecting persons and property, as well as ensuring the legal framework necessary for the execution of contracts and the exercise of property rights, on the one hand, and excessive fiscal burden and public expenditure, which is likely to hinder economic growth and prosperity, on the other hand. On this basis, the author concludes that the current “typical” share of the state sector, located between 30% and 45% of GDP, is far too high in terms of the objective of optimal economic growth.
In his view, the public sector should be between 15% and 25% of GDP, including possible social security costs. However, since a large part of public spending is driven by the state taking on tasks that should ideally go to the market economy or civil society, this level is undoubtedly distorted upwards. The desirable level should probably be around 12%-13% of GDP, taking into account, of course, the quality and efficiency of public expenditure, as well as their concentration on ensuring the capacity to exercise basic functions of the state.
- Costs of state maintenance and action
Empirical research of the experience gained around the world shows, therefore, that there is an inverse relationship between the burden of state maintenance and action, on the one hand, and prosperity on the other. The explanation lies in the fact that the existence and activity of the state involve a certain cost. An important element of this cost is the extraction of resources: any action by the state requires a source of financing constituted by the diversion of funds from the private economic circuit. As a result, those resources are no longer available, either in the short term or in the long term, to finance private production and investment. This “crowding-out effect” therefore prevents the creation of additional wealth.
Typically, more than 90% of state revenues come from taxation, but the cost of extraction also includes debt contracted by the state, which equates to future taxes. To the official level of public debt, the commitment to cover the deficit of the social security budget, implicit debt, which also requires future tax increases is added. In addition, there is a hidden tax, namely the inflation tax or seniority, created by the state monopoly on the monetary issue: in the current context of high inflation, this tax is very high, which makes the real resources obtained by the state in this way, resources as real as those obtained through taxes, considerable. Finally, one form of taxation is regulation itself: instead of intervening directly, the state directs by laws, decrees, instructions, etc., the allocation of resources, limiting their use by individuals or imposing on citizens a certain use of them.
Even though the state sector seems able to perform an impressive volume of benefits, thanks to the important resources it extracts from the private sector, the state expenditure does not compare in terms of efficiency with the expenditure made by individuals to produce the goods and services demanded on the market: without the signal of prices and profit, the production of goods and services carried out by the state cannot be evaluated according to the criterion of utility, which makes the allocation of resources achieved in this way probably suboptimal. In the absence of information on consumer preferences transmitted by prices, it is indeed impossible for the state bodies to know what goods to produce and in what quantity. Without profit and market discipline, and without any material liability for the losses they cause and the mistakes they commit, state decision-makers do not seek to reduce costs, but rather to “inflate” them to meet their personal interests. This, at best, because artificial increases or ignoring costs may simply be aimed at consuming the allocated funds. Far from “stimulating” economic growth and demand, the state actually exerts a negative multiplier effect.
In addition to the costs of extraction and those caused by the land inefficiency of the state, public expenditure also exerts another evictional effect, plus a saturation effect. The first is because the state finances its expenses by coercion or protects its activities by legal privileges, which makes private enterprises face unfair competition. The consequence is that the state intervention hinders the innovation process, thus causing the stagnation of the economy: private sector entrepreneurs are constantly looking for new options and new opportunities; statist programs are, on the contrary, inflexible, bureaucratic administered and ossified by regulations impossible to change otherwise than by creating a new democratic majority.
It is true that not all public spending is equally ineffective. Expenditure on education, for example, can contribute to the formation of the productive capacities of individuals and thus to the cultivation of their skills to work and earn a living throughout their lives. However, even in this case, these expenses cannot be considered “productive” in the true sense of the word because of their tax financing. For if the problem is properly formulated, that is to say, the related tax costs are taken into account, there is no empirical link between the volume of public expenditure of this kind and prosperity.
The state offer conceals the fact that the free market and civil society, whether for profit or not, are able to meet investment needs, including in areas such as education and infrastructure creation. Of course, the state, through its specific mode of financing, can offer more such goods than the private sector, going as far as saturation of society, for example, with diplomas, but this at the cost of a general reduction in prosperity.
Socially, state spending causes behavioural distortions: the extraction of resources from the private sector diminishes incentives to work and invest. As a result, the higher and progressive the sampling, the greater their negative impact on production. The state actually subsidizes the underuse of the factors of production and their suboptimal allocation because it makes the non-labour and consumption more attractive than the productive activity and saving, on which the formation of capital depends.
The “social” policy of the state has a double counterproductive effect. First, the statist programs mentioned the depressive effect of taxation on capital formation. Secondly, programs of this kind cause individuals’ responsibility for their own fate to decrease because they are all put in the same situation and are subject to the same regime. In this way, equality becomes egalitarianism. In this “brave new world” (A. Huxley), not only is saving more difficult because of high taxation, but it also becomes less desirable because the needs of individuals are apparently satisfied by the supply of goods and services from the state. State expenditure thus discourages the genuinely rational decisions of individuals to be economic, to contribute to private pension or health systems, etc., which in themselves diminish the onerous tendencies to overburden public services of this kind, natural impulses to which incites the illusion of gratuitousness and the collectivization of the related costs. Therefore, “social policy” is called by some authors “the war of all against all.” Unlike individual decisions to raise white money for dark days and to contribute to private insurance services, or voluntary donations inspired by charity, social benefits, although often animated by good intentions, create, through the distortion of motivations, a permanent source of social tension, eventually, it reduces prosperity.
- Solutions to relaunch the economy
The negative impact of excessive statism on economic growth and living standards suggests that increasing public spending is not a solution in the current social-economic context. Increasing well-being even in crisis conditions requires, on the contrary, reorienting the state to its basic functions and parallel reduction of extraction costs. The quarantine established in many countries during the pandemic shows the role of productive work, free trade and saving in raising living standards: the sustainable well-being of society has no other source. High and widespread prosperity is based on a supply of goods and services tailored to the needs of consumers through the market and the action of entrepreneurs.
This rational way of creating wealth must therefore be fostered by its relief from the excessive tax burden imposed by the maintenance and action of the state. In Romania, this means, contrary to some political promises, maintaining the current relatively low rates of corporate income tax and corporate income tax: this form of taxation is moderate and, as a result, does not discourage economic activity. The increase in these taxes would have the opposite effect, because, although they are paid by businesses, the related tax burden is actually borne by individuals: employees, customers and suppliers and less owners. The increase in corporate taxes would therefore be by far the most harmful measure in terms of re-launching economic growth and maintaining a reasonable degree of employment, as it directly affects the formation of productive capital, intended to be reinvested in economic activities or in the innovation of products and manufacturing processes.
The second necessary measure in Romania’s case is the reduction of tax and salary contributions. The high taxation of labour is an anomaly of the Romanian tax system, which contributes to the worsening of the economic and social problems of Romania: the large number of people in power who do not work and do not seek a job, the increase in the number of beneficiaries of social benefits, emigration, etc. By reducing the taxation of labour, the Romanian state could instead devote itself to its basic tasks and to reforming its highly centralized organization and its plethoric administrative apparatus.
Such an investment in the future, made in the form of tax relief, is the best thing that can be done in the current situation of Romania: in this way, resources would be left to the private sector, which would use them through individual decisions that are genuinely rational, taken according to economic calculations of an entrepreneurial nature. At the same time, the waste inherent in political and bureaucratic spending would be reduced.
On the other hand, in order to increase personal responsibility for the future and reduce the amount of social expenditure, it is possible to raise the retirement age and abolish special pensions. In Romania, life expectancy has increased, the weight of physical work has decreased, the risks of work accidents have reduced, and health has improved. As a result, maintaining a rentier status for a long time after working life is explained only by the institutional immobility of a state captured by the “rent seekers”. In these circumstances, the reform of Romania’s highly redistributive tax system is beneficial in several respects: it allows both the reduction of extraction costs and the relaunch of the economy by avoiding the retirement of qualified and experienced staff too early.
The worst mistake of “relaunching” policies is the belief that if the state doesn’t do something, no one else can do it for themselves. The free market and civil society, that is, those directly affected by the decisions they make, knowing better than anyone else what needs they have and how they can meet them, are able not only to produce the goods and services that are socially necessary, they do it better and cheaper than the state – without the costs of extraction, inefficiency, stagnation and demotivation linked to an exaggerated volume of public expenditure. Even if there is no “perfect” solution to the complex situation of the world economy, it is undeniable that overcoming the many current crises requires the release of energies and resources in order to relaunch productive activity – first of all in the interest of the young generations, they are most affected by the loss of prospects caused by the burdensome burden of state maintenance.
(Translation from Romanian by Ruxandra-Florina Cristian.)
Photo source: Wikimedia Commons.
 Many such empirical analyzes are conducted periodically under the aegis of the OECD. See, for example: A. Bassanini, S. Scarpetta, The Driving Forces of Economic Growth: Panel Data Evidence for the OECD Countries, OECD Economic Studies, vol. 2001/2, https://doi.org/10.1787/eco_studies-v2001-art10-en.
 These implications are summarized by the indices of economic freedom published annually by specialized agencies. See, for example: 2022 Index of Economic Freedom–The Heritage Foundation, https://www.heritage.org/index/; Economic Freedom of the World, 2022 Annual Report, https://www.libinst.ch/publications/LI-EFW-2022.pdf; Economic Freedom of the World: 2022 Annual Report, Cato Institute, https://www.cato.org/economic-freedom-world/2022.
 See also: A. Wooldridge, the aristocracy of talent. How Meritocracy created the modern World, Polirom, București, 2022; Aghion, C. Antonin, S. Bunel, Le Pouvoir de la destruction créatrice, Odile Jacob, Paris, 2020.
 P. Minford, D. Meenagh, J. Wang, Testing a Simple Structural Model of Endogenous Growth, Centre for Dynamic Macroeconomic Analysis Conference Papers 2006, https://www.researchgate.net/publication/24126575.
 R. Rahn, H. Fox, What Is the Optimum Size of Government, Vernon K. Krieble Foundation, 1996.
 S. Cerna, Seniorajul, Œconomica, no. 3-4/2018,
 D. Mitchell, The Impact of Government Spending on Economic Growth, Backgrounder 1831, Heritage Foundation, March 2005.
 S. Cerna, Teoria capitalului uman: analiza economică a educației, Œconomica, 1-2/2020,
 S. Cerna, Morala îndoielnică și pericolele statului social,
 P. Salin, Libéralisme, Odile Jacob, Paris, 2000, p. 500.
 Cf. P. Bessard, L'illusion de l'imposition des entreprises, Institut Libéral, 2008, http://www.libinst.ch/publikationen/LI-Briefing-UnternBesteuer-f.pdf.
 Cf. V. Ghețău, Speranța de viață a românilor,
 Pentru analiza modului în care s-a ajuns în această situație, v. S. Cerna, Tranziția și grupurile de interese, Œconomica, 2, 2011, p. 15-27,