*Government Size and Implications for Economic Growth*

by on July 29, 2010 at 10:55 am in Books, Data Source, Economics | Permalink

The authors are Andreas Bergh and Magnus Henrekson and this book is a good summary of ongoing attempts to correlate the size of government with economic growth.

Nonetheless the book does not answer my two longstanding objections to how this literature is sometimes interpreted:

1. To what extent is "economic freedom" actually proxying for "quality of government?" (the link is the best blog post of this year so far, by the way)

2. Why say so much about growth rates and so little about income levels?  The latter are positively correlated with size of government.  You don't have to view big government as causing high per capita income, but at the very least the account of differential growth rates should be consistent with the account of differential levels of per capita income.

Why does AEI price the paperback at $20?  Aren't think tanks supposed to subsidize the books they produce?  Amazon, by the way, was claiming (incorrectly) that there is a hardcover at $30.

1 enrique July 29, 2010 at 11:38 am

regarding the link between “freedom,” income levels, and size govt, there is an excellent essay by the economist George Stigler that I highly recommend “Wealth, and Possibly Liberty” published in 1978 in the journal of legal studies — Stigler’s critique of Hayek is devastating

2 KPres July 29, 2010 at 11:57 am

I don’t understand the objection (or at least the objection brought up in the link you provided). Of course good government is an important factor in economic growth. Is the claim that Fiscal Conservatives/Libertarians deny this? I also notice the link shows that protection of private property, not government spending, is the factor that’s most closely correlated. Again, what’s the objection? I’d say the Heritage Foundation’s position is that property rights are the primary responsibility of government.

None of that changes the fact that economic growth is correlated with less government spending. And showing that “Good Government” is also correlated doesn’t change that in any way. It just means there’s another important factor as well (one that I had always assumed was so obvious that it need not be mentioned.)


Obama was only half right when he said this:

“So what we should be asking is not whether we need a ‘big government’ or a ‘small government’, but how we can create a smarter, better government.”

No. What you need is a government that’s both small AND smart. (And he and Bush each fail on one count!)

3 Chris July 29, 2010 at 12:09 pm

Price discrimination. Influential people get the book for free. People who buy the book are paying average cost of production on a small print run.

4 Andrew July 29, 2010 at 12:23 pm

“I also notice the link shows that protection of private property, not government spending, is the factor that’s most closely correlated.”

Several of us noticed this little semantic trick the first time it came around.

I assume Tyler thinks the post is thought-provoking. But for someone to basically say “ah, you market types are kidding yourselves, it’s the property, stupid!” seems like we can’t take the rest of their analysis at face value.

So, perhaps a government has to increase commensurate with the amount of property protected partly because un-corrupt governments tend not to like private protection services.

5 Andrew Edwards July 29, 2010 at 1:28 pm

You always have to be careful with cause and effect on this stuff. The data can be very very noisy.

Take two economies: Growthia and Stagnatia

Both pay for full healthcare coverage for citizens, which costs $100 a year.

Unrelatedly (say due to huge oil reserves), Growthia is a much stronger economy and has grown at 10% a year to the point where its GDP is now $500 a person.

Stagnatia has been stagnant for years and has GDP per capita of $200.

Growthia has an apparently smaller government (20% of GDP vs. 50%) and apparently higher growth (10% a year vs 0%), without there being any relationship between the two concepts….

6 Bill July 29, 2010 at 4:24 pm

Gee, published by the American Enterprise Institute.

Couldn’t you find one published by Cato?

7 mulp July 30, 2010 at 12:22 pm

From Tyler’s links today on Mexico drug war: http://www.nytimes.com/2010/07/30/opinion/30flores-macias.html?_r=1&ref=opinion

Like Mexico, Colombia confronted a domestic security crisis that it could not afford to resolve without higher tax revenues. So it created a “wealth tax† directed at the country’s richest taxpayers, earmarked to finance the security effort.

Then, realizing that the wealthy would tolerate increased taxes only if they believed the government was not squandering resources through corruption or inefficiency, President Álvaro Uribe mandated that security forces provide annual, publicly available reports on how money is spent and how effectively it is used.
Mexico stands to learn a valuable lesson from Colombia’s experience. At 11 percent of its gross domestic product, Mexico’s tax collection capacity ranks among the lowest in Latin American countries — compared, for example, with Brazil’s 23 percent. Without increased tax revenues, its antidrug efforts will not be sustainable.

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