The Reagan expansion was boosted by tax cuts. The post-war expansion also was accompanied by low taxes and low government spending. To restore economic growth, it is important to reduce government spending. In other words, the economy experiences a net loss of 0.38 cents. From their analysis, it follows that in 1994, if the federal government were to reduce its spending by four percentage points, economic growth would have increased to 5.4 percent.
Government spending reduces GDP growth for two reasons.
The first is that government spending is inefficient. Economic efficiency requires good information, flexibility, and responsibility. Governments spend money based upon political calculations, not necessarily economic calculations. Special interest groups have an incentive to give biased information to political decision makers, as evidenced by the legions of lobbyists. Responsibility is divided as decision-making is shared by Congress, the President, and bureaucrats in the Administration.