I’m not sure how much credence to place in this op-ed from James Dorn on the relationship between the size of government and economic growth:
In a pioneering study of the link between the growth of government and the wealth of nations, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.
I will make two points on the subject.
First, there are things that we want that can only be provided by governments. A legal system. Law enforcement. National security. A sound currency. I believe that only fools want to do away with government entirely but the question brings us back to the Goldilocks game: how much is just right? I feel confident in suggesting that as economic growth slows, more government becomes increasingly difficult to afford.
Second, I think there’s a difference between government as such and the regulatory state. How do you measure the effectiveness of a the regulatory state? What is its output? Obviously, regulations. And an effect of regulations is to slow economic growth.
I would suggest that one good measure of the effectiveness of the regulatory state is how much it slows economic growth. And there is a point at which slowing economic growth is a luxury too dear to afford.
While it is possible to imagine a different sort of regulatory state and it is perhaps true that we need a different sort of regulatory state, I think that’s the sort of regulatory state we have.
Seems like another case of economists studying a particular range of a problem (in this case how does increasing the size of government in terms of percentage of GDP impact future growth) and extrapolating general results on a linear basis.
Not to mention that “government” covers a vast _potential_ range of activities. Some of the activities could be harmful or helpful.
Ultimately, it looks like another completely useless exercise of economics. (That’s the set up. Supply your own punchlines.)
It is certainly possible that some taxes reduce growth. That’s what they’re primarily for, to slow an econony by reducing financial assets.
Otherwise the most obvious relationship this paper reveals is that as economies mature their growth rate slows. China (not included) has had a tremendous government footprint along with double digit growth for years, yet it’s now slowing in part because the low-hanging fruit has been picked.
I think Ben gets it. As nation states mature, and their economies mature, they slow. That seems to be true whether or not the size of govt increases.
Several points.
Nations can go through periods of slow or rapid growth depending on a number of factors. They simply mature, demographic, technological innovation or post dramatic events like war for example. It does not follow logically that growth is independent from government size or policy.
I would argue that in some (early) periods growth is enhanced by government as things like legal systems or infrastructure are facilitative. In other periods they are a hindrance through regulatory drag or the missal locations of capture, and the almost always less robust use of resources of the public vs private sector. As ice pointed out, this is not, nor is there any reason to believe this would be a linear effect.
I don’t know of anyone who believes in zero government. But I do know of people who are just infinitesimally this side of more government always and everywhere. Just look at the comments section over at OTB. As a “small government guy,” my complaint isn’t that we don’t have zero or de minimus government, it is that governments, politicians and their apologists do not seem to be able to throttle down in the face of the realities of slow growth in output or incomes, and government overreach. It’s nothing more than if you only have a hammer everything looks like a nail, but it comes at great social cost.