'The Entrepreneurial State': Apple Didn't Build Your iPhone; Your Taxes Did

Mariana Mazzucato | PBS.org | September 20, 2013

Is government debt slowing economic growth, if not impeding it? The world-wide economic crisis that began in 2007 has kept that question alive, despite the fact that it was private debt that caused the crisis in the first place. But attempts to curb the crisis have also led to an explosion of public sector expenditures like bank bailouts and unemployment insurance that have ballooned debt levels. At the same time, lower tax receipts due to falling incomes have prompted even more borrowing.

Yet amnesia and dogma have conflated the public debt that helped cure the crisis with the private debt that caused it. The Reinhart-Rogoff saga seems to have ended with evidence winning out over ideological fiction. That's because the government debt threshold these noted economists supposedly discovered -- surpass a 90 percent ratio of debt-to-GDP and you're screwed -- seems to have been based on statistical error. But despite the correction, countries across the globe are still being asked to slash spending in hopes of kick starting economic growth.

My own work shows the utter foolishness of such a strategy. What matters is not the absolute size of debt, but what that debt consists of. Throughout history, strategic government expenditures have played a key role in spurring economic growth. Indeed, by forcing the world's weakest economies to cut public spending -- in key areas like education, research and health -- their potential for long-run growth is weakening. Spain, for instance, has cut its research spending by 40 percent since 2009. Will this help it create the kind of goods and services the world might want to buy -- and be as competitive as its Nordic neighbors? It seems wildly unlikely.