Although Connecticut has the nation’s highest average per capita income at $41,300, the state is among the bottom four in the percentage of that income used to fund public services, according to a report in the latest edition of The Connecticut Economy, a University of Connecticut Quarterly Review.
In a study seeking to define the optimal amount of funding states should devote to public services without adversely affecting a state’s economy, Steven P. Lanza, executive editor of the magazine, collected 16 years (1993-2008) of personal income statistics for the 50 states from the U.S. Bureau of Economic Analysis, and government spending data for the same period from the U.S. Census of Governments. He found that Connecticut under-spends on most government activities, including education and infrastructure, while spending more than the optimal amount on health care.
“Public spending in the Nutmeg state averaged just 17.6 percent of income in the years surveyed, more than six points below the optimal share,” Lanza writes.
The right amount of spending on public services can actually benefit the economy, by helping the private sector grow, he says: “With such a lean public sector, Connecticut essentially forfeited an additional 1.2 percent in yearly income it would otherwise have earned, had it adopted the optimal mix.”
That optimal mix, Lanza says, is 24 percent. The national average is 22 percent, still significantly higher than Connecticut’s 17.6 percent.
“It’s a balancing act, because as you increase government services you have to increase taxes to support them,” says Lanza. “Up to a point, by increasing services you’re providing things that help the economy grow – education, infrastructure. Even welfare, if it helps people transition from unemployment, lubricates the economy. Beyond that point, though, you’re getting lower marginal returns. The extra services are simply not worth the foregone opportunity cost of taking more resources out of the private sector.”
Lanza says he is not advocating that government should spend money on anything just to reach the optimal number.
“To fritter away resources on anything is not cost effective. I’m not saying let’s do dumb things just to get the number up. But there are areas where spending can help grow the state’s economy,” he says.
“As a share of overall economic activity, Connecticut government is small. There’s no disputing that. It’s a fact. When people think government is too big, too intrusive, they often point to property taxes and yeah, they’re right. Our property taxes are way out of line with other states. But that’s about the structure of Connecticut’s taxes. Overall, we’re small,” he says.
The Connecticut Economy’s other editors, Dennis R. Heffley, an economics professor, and Arthur W. Wright, an emeritus professor of economics, also weigh in with articles based on recent research, Wright considering whether the recent downturn in casino revenues can be staunched, and Heffley looking at teacher salaries in Connecticut and their relationship to the pay of other workers.
