Study: "Significant negative correlation" between increase in government size and economic growth

  • Posted by a hidden member.
    Log in to view his profile

    Jun 11, 2012 10:17 PM GMT
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734206

    The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate.
  • Posted by a hidden member.
    Log in to view his profile

    Jun 12, 2012 12:08 AM GMT
    Uh.. Sweden is NOT like 'most countries'......... and definitely unlike the united States..

    and your point is?icon_rolleyes.gif
  • Posted by a hidden member.
    Log in to view his profile

    Jun 12, 2012 1:38 AM GMT
    TropicalMark saidUh.. Sweden is NOT like 'most countries'......... and definitely unlike the united States..

    and your point is?icon_rolleyes.gif


    Lol, let's not be snarky here. The paper does not address special circumstances such as recessions. And correlations don't imply causation. We have the lowest effective tax rates right now for a long time in the US and our growth is anemic. Go figure.

    Some great quotes from the paper:

    A negative correlation between government size and economic growth does not imply that big government causes low growth. In fact, the most obvious reason (among many) to suspect reverse causality a problem is that in welfare states social insurance schemes act as automatic stabilizers. For example, in Sweden total public expenditure peaked at the extremely high level of approximately 70 percent of GDP in 1993. This resulted from record high expenditures for unemployment benefits, which in turn were caused by high layoffs. In general, in times of economic downturn social expenditure provides stabilizers that automatically undermine the government’s balanced budget. On the other hand, in boom years when growth rates are higher, fewer people will be unemployed, and public expenditure shares will be lower. For this reason, a negative correlation between public expenditure and economic growth is to be expected in the short run. Consequently, finding a negative correlation is therefore no proof that high expenditure causes low growth.
    ...
    Finally, while there is close to a consensus on the sign of the correlation, there is also consensus on the fact that causality is very hard to establish with certainty using the method of instrumental variable estimation—or any other method currently available. In fact, it is close to conceptually meaningless to discuss a causal effect from an aggregate such as government size on economic growth. Thus, several scholars in our view have rightly concluded it is more fruitful to analyze separately the mechanisms through which different taxes and expenditure affect growth. Not all taxes are equally harmful, and some studies identify public spending on education and public investment to be positively related to growth.


    It then goes into why Sweden seems to buck the trend, and the 2nd explanation goes into something murky but probably true: that there's more social trust which lowers transactional costs.

    A third reason why the condition of trust may be central importance is furnished by Aghion et al. (2010b) in an article entitled ―Regulations and Distrust‖. The authors argue that low trust plays a pivotal role, leading voters to demand more detailed regulation of the economy, since they do not trust bureaucrats with discretionary power. This mechanism is verified and extended by Bergh and Bjørnskov (2011) who demonstrate that countries with higher historical trust levels also have lower business and credit market regulations. Conversely, higher trust in the Scandinavian countries may well be an important explanation both for the size of their public sectors as well as for their economic growth.

    The concluding remarks also emphasize that investment in human capital by the government increases growth.