Budget, Taxes

Government size and growth: A survey and interpretation of the evidence

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Last updated: August 29, 2011

Swedish-Parliament

U.S. policymakers find themselves engaged in an often intractable and largely polarized debate about the size of government and its relationship to overall economic growth. A cause (or perhaps symptom) of this partisan polarization is a number of studies with highly variable results on the impact of government size on economic growth.

A 2011 paper by the Sweden-based Research Institute of Industrial Economics, “Government Size and Growth: A Survey and Interpretation of the Evidence,” analyzed 13 previous studies to better understand their contradictory results by accounting for their varying contexts and definitions of government size.

Highlights of the working paper include:

  • Some of the research examined shows a potentially negative relationship between government size and growth: “The most recent studies find a negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate.” However, the researchers question whether previous research demonstratively established causality between government size and slower economic growth.
  • The paper warns against over-generalization of measures of government size and policies. For example, “not all taxes are equally harmful, and some studies identify public spending on education and public investment to be positively related to growth.”
  • While previous literature has struggled to explain the growth of Scandinavian states, the researchers note that “welfare states with high taxes … compensate negative growth effects from large government by applying other growth-promoting policies.”
  • There is a strongly observed correlation between government size and social trust, which enables countries to sustain larger governments without harming the economy. Additionally, studies have shown a link between trust and overall economic growth. Thus omitting “trust” as a variable from any analysis may lead to bias.
  • High rates of growth are seen in a diverse group of nations, some with large governments and others with small governments. “This does not mean low-tax countries can increase taxes without expecting negative effects on growth, nor that the various mechanisms by which high taxes distort the economy do not apply in Scandinavia.”
  • Once mitigating factors and context are taken into account, there is actually near consensus in the correlation displayed by previous studies. Causality is hard to establish, however, and academically it is meaningless to discuss a specific causal effect from broad aggregate measures such as government size on economic growth.

The researchers conclude that these “results do not imply that government must shrink for growth to increase. There is potential for increasing growth by restructuring taxes and expenditures so that the negative effects on growth for a given government size are minimized.” The study’s findings, they note, have only “ambiguous policy implications.”

Tags: economy, employment, Congress, metastudy, campaign issue


Writer: | August 29, 2011

Analysis assignments

Read the study titled "Government Size and Growth: A Survey and Interpretation of the Evidence."

  1. Summarize the study in fewer than 40 words.
  2. Express the study's key term(s) in language a lay audience can understand.
  3. Evaluate the study's limitations. (For example: Do the results conflict with those of other reliable studies? Are there weaknesses in the study's data or research design?)

Read the study-related Forbes article titled "The Long-Term Stakes of the Debt-Ceiling Fracas."

  1. Reporter's use of the study: Evaluate what the reporter chose to include and exclude from the study. Would the audience have acquired a clear understanding of the study's findings and limits from this article?
  2. Reporter's use of other material: Assess the material in the article that is not derived from the study. (for example: Does the reporter place the study in the context of other research and to what effect? Does the reporter include reactions to the study from other researchers or interested parties [e.g., political groups business leaders, or community members] and are their credentials or possible biases made clear?)

Newswriting assignments

  1. Write a lead (or headline or nut graph) based on the study.
  2. Spend 60 minutes exploring the issue by accessing sources of information other than the study. Write a lead (or headline or nut graph) based on the study but informed by the new information. Does the new information significantly change what one would write based on the study alone?
  3. Interview two sources with a stake in or knowledge of the issue. Be prepared to provide them with a short summary of the study in order to get their response to it. Write a 400-word article about the study incorporating material from the interviews.
  4. Spend additional time exploring the issue and then write a 1,200-word background article, focusing on major aspects of the issue.

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