Large government follows successful economies because unsuccessful economies can't take the drag. That's large in absolute terms. Compared to the economy you have examples of large governments where there never was a successful economy (by today's standards at least), but they are rare, and they are economic basket cases, think North Korea.
They also allow for succesful economies, as do small governments.
Because large governments are required for successful economies.
There is no such requirement.
Examples?
freedomandprosperity.org
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Two Swedish economists, Andreas Bergh and Magnus Henrekson, looked at several studies of the effect of government size on economic growth. The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach-of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time-reveals a more consistent picture. 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. [My emphasis.]
The equation I gave above is consistent with this latter number: if government increases by 10% of GDP, then the real growth rate is reduced by one percentage point.
Another way to justify something is with facts. The graph below plots real GDP growth vs. government spending (as % of GDP) for all "advanced economies" for all years for which the International Monetary Fund has data.
The dark line in this chart is the linear regression line, and it approximately represents the equation I gave above. (More exactly, it is Growth = 7.165058 - 0.10518 X Spending.) This negative correlation between government spending and government growth is statistically significant.
We get a chart similar to the one above even if we take averages for each country. In the chart below, each point is a country, using the average values over the years for which the IMF has data. Again, the downward slope is statistically significant. (In this case, the equation is Growth = 6.348661 - 0.08472 X Spending.)
It is true that some countries grow faster than the linear regression line would indicate, and some slower. But this simple regression analysis says government spending explains almost half of the growth rate.
If you believe my equation, it vindicates conservatives: bigger government stifles growth. Yet it also vindicates statists: a government would need to spend 70% of GDP to stop growth altogether, and a government that takes half of everything could still grow about 2% per year. That is not exactly a gang-busting rate, but a lot of countries would be happy with 2% right now.
If we take away the four Asian Tigers of Hong Kong, Korea, Singapore, and Taiwan, the other advanced economies spent between 35% (Switzerland) and 56% (France) of their GDPs in 2011. Per my equation, the growth rates should be between 1.4% and 3.5% per year.
Why should Average Joe Voter care whether GDP grows 1.4% or 3.5%, especially if he thinks he's getting some good things from government like roads, schools, health care, and more equally spread wealth? The difference between 1.4% and 3.5% doesn't seem like a big deal.
I would ask Joe Voter to bear with me as we discuss a thing called compound interest. Let's take two countries, A and B. A's GDP grows 1.4% per year, and B's grows 3.5% per year. Let's say both have the same GDP in year zero.
In 20 years, country A would be 32% more wealthy than it started. Its citizens would have seen progress and wealth growth. If they had no one to compare themselves to, they might think things were swell.
But in those same 20 years, country B would be 99% more wealthy than it started. While they both started out equal, after 20 years, country B will be 50% more wealthy than country A. Average Joe Voter in country A will start to take notice. In 2011, for example, Canada was 40% more wealthy than Cyprus (GDP per capita, purchasing power parity). People can notice differences of such magnitudes.
americanthinker.com
...During the last 20 years, there have been radical shifts in the fiscal stance in many OECD countries. In the 1970s and early 1980s, these were largely the result of fiscal profligacy leading to the accumulation of large fiscal deficits. Since the mid-1980s, several large OECD economies have implemented major fiscal adjustments to slow the growth of public debt. Alesina and his coauthors use panel data over this period for 18 OECD countries, including the United States, Canada, Japan, the United Kingdom, Germany, France, and Italy. They focus on the role of profits in determining current and expected investment.
Changes in public spending and taxation affect corporate profits, and thus private investment, the researchers find. Changes in public spending have a bigger impact than tax changes do. Particularly important are changes in the public wage bill and in government transfers. This is because the labor market is the main channel linking these effects of fiscal policy on growth. Higher wages cut into profits, reducing investment, and as a result, economic growth.
Increases in public wages also can push up wage demands in the private sector, both in unionized and non-unionized labor markets. Increases in the number of public sector jobs lead to tighter labor market conditions and increased wage pressure. More generous government transfers to those who are out of work can also bid up private sector wages. The opposite holds for cuts in public wages and public employment.
The magnitude of these effects, the researchers find, is substantial. A reduction by 1 percentage point in the ratio of primary spending to GDP in the sample OECD countries leads to an immediate increase in the investment/GDP ratio by 0.16 percentage points. It leads to a cumulative increase by 0.5 percentage points after two years and by 0.8 percentage points after five years. This effect is particularly pronounced when the spending cut is achieved through lower government wages. A cut in the public wage bill of 1 percent of GDP leads to an immediate increase in the investment/GDP ratio by 0.51 percentage points, by 1.83 percentage points after two years, and by 2.77 percentage points after five years.
Increases in taxes also reduce profits and investment, but the magnitude of these tax effects is smaller than those on the expenditure side..
nber.org
Subsidies, Education, and Competitiveness
……What about invasive government in the form of subsidies? First, we need to recognize that the main problem with subsidies is that they make people dependent; and when you make people dependent, they lose their innovation and their creativity and become even more dependent.
Let me give you an example: By 1984, New Zealand sheep farming was receiving about 44 percent of its income from government subsidies. Its major product was lamb, and lamb in the international marketplace was selling for about $12.50 (with the government providing another $12.50) per carcass. Well, we did away with all sheep farming subsidies within one year. And of course the sheep farmers were unhappy. But once they accepted the fact that the subsidies weren’t coming back, they put together a team of people charged with figuring out how they could get $30 per lamb carcass. The team reported back that this would be difficult, but not impossible. It required producing an entirely different product, processing it in a different way and selling it in different markets. And within two years, by 1989, they had succeeded in converting their $12.50 product into something worth $30. By 1991, it was worth $42; by 1994 it was worth $74; and by 1999 it was worth $115. In other words, the New Zealand sheep industry went out into the marketplace and found people who would pay higher prices for its product. You can now go into the best restaurants in the U.S. and buy New Zealand lamb, and you’ll be paying somewhere between $35 and $60 per pound.
Needless to say, as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises - and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded, probably because families are prepared to work for less than corporations. In the end, it was the best thing that possibly could have happened. And it demonstrated that if you give people no choice but to be creative and innovative, they will find solutions.
libertyforall.net
The U.S. Postwar Miracle
David R. Henderson | Nov 04, 2010
We often hear that big cuts in government spending over a short time are a bad idea. The case against big cuts, typically made by Keynesian economists, is twofold. First, large cuts in government spending, with no offsetting tax cuts, would lead to a large drop in aggregate demand for goods and services, thus causing a recession or even a depression. Second, with a major shift in demand (fewer government goods and services and more private ones), the economy will experience a wrenching readjustment, during which people will be unemployed and the economy will slow.
Yet, this scenario has already occurred in the United States, and the result was an astonishing boom. In the four years from peak World War II spending in 1944 to 1948, the U.S. government cut spending by $72 billion—a 75-percent reduction. It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948, a drop of over 35 percentage points of GNP.
While government spending fell like a stone, federal tax revenues fell only a little, from a peak of $44.4 billion in 1945 to $39.7 billion in 1947 and $41.4 billion in 1948. In other words, from peak to trough, tax revenues fell by only $4.7 billion, or 10.6 percent. Yet, the economy boomed. The unemployment rate, which was artificially low at the end of the war because many millions of workers had been drafted into the U.S. armed services, did increase. But during the years from 1945 to 1948, it reached its peak at only 3.9 percent in 1946, and, for the months from September 1945 to December 1948, the average unemployment rate was only 3.5 percent.
Ask people who lived through that period as young adults what economic conditions were like, and you will inevitably get the answer that they experienced an economic boom. The U.S. economy during the post-World War II years is exhibit A against the Keynesian view that economies will necessarily suffer high unemployment and slow growth when governments make big cuts in government spending. Why did the U.S. economy do so well in the years following World War II given how badly it had done in the years preceding America’s entry into the war? The answer, in a nutshell, is that dramatically reducing government spending and deregulating an economy can take that economy from sickness to health. In short, one of the main things a government can do to help a weak economy recover is to step aside.
mercatus.org
Canada’s Budget Triumph
David R. Henderson | Sep 30, 2010
A federal government runs a large deficit. Deficits are so large that the ratio of federal debt to Gross Domestic Product (GDP) approaches 70 percent. A constituency of voters have gotten used to large federal spending programs. Does that sound like the United States? Well, yes. But it also describes Canada in 1993. Yet, just 16 years later, Canada’s federal debt had fallen from 67 percent to only 29 percent of GDP. Moreover, in every year between 1997 and 2008, Canada’s federal government had a budget surplus. In one fiscal year, 2000–2001, its surplus was a whopping 1.8 percent of GDP. If the U.S. government had such a surplus today, that would amount to a cool $263 billion rather than the current deficit of more than $1.5 trillion.
We often think of Canada as a more-socialist and higher-tax country than the United States, and for good reason: to some extent it’s true. For instance, Canada has a single-payer health care system, no private universities, and a five-percent federal tax on goods and services. So, what happened? How did the Canadian government do it? You might think that the Canadian government achieved the budget surplus by 2000–2001 with major increases in taxes, but it didn’t. Part of the fiscal improvement was due to high economic growth. But economic growth is, in part, a result of policy, not a policy itself.
The main policy actions that the Canadian government took to shrink its budget deficit and turn deficits into surpluses were cuts in government spending. Moreover, the Canadian government didn’t just cut the growth rate of spending, a favorite trick of U.S. politicians who want to claim the mantle of fiscal conservatism. It also cut absolute spending on many programs in dollar terms. And because the inflation rate in Canada, though low, was greater than zero over the whole time period, these cuts in dollar terms were even larger in inflation-adjusted dollars.
There are two morals of this story. First, the Canadian experience shows us that a large budget deficit can be turned into a budget surplus with ten years of fiscal discipline, mainly with spending cuts. It can happen here in the United States. We do not have to accept the idea that we have only two grim choices: living with huge budget deficits and a federal debt that both increase as a percent of GDP, or accepting our current spending but reducing the budget deficit with major tax increases.
The second moral of the story is that the Canadian experience does not support the Keynesian view that policymakers should not cut government spending during an economic slowdown. The Canadian experience, just like the U.S. experience during the 1920–21 recession and in the first two years following World War II, shows that cutting government spending even during low-growth years can be good for long-term economic results.
Following is the story of how Canada achieved fiscal discipline, turned a budget deficit into a surplus, and in the process became one of the healthiest economies in the G-7.
mercatus.org
...1. Between 1960 and 1990: Among OECD (Organization for Economic Cooperation and Development) countries, those with the largest government sectors (spending in excess of 60 percent of GDP) had the lowest growth rates. Those with the smallest proportion of government spending (less than 25 percent of GDP) had the highest growth rates—more than four times faster...
thefreemanonline.org
New Study from Swedish Economists Allows Us to Quantify the Cost of the Bush-Obama Spending Binge
Posted by Daniel J. Mitchell
The United States has been on a decade-long spending binge. Thanks to the profligate policies of both Bush and Obama, the burden of federal spending has climbed to about 25 percent of economic output, up from 18.2 percent of GDP when Bill Clinton left office.
The political class tells us that more government is good for the economy since it an “investment” and/or a “stimulus.”
The academic research, however, tells a different story. Here are some brief excerpts from a recent study by two Swedish economists, including a critically important observation about the impact of bigger government on economic performance.
…most recent studies typically find a negative correlation between total government size and economic growth. …the most convincing studies are those most recently published. …In general, research has come very close to a consensus that in rich countries there is a negative correlation between total government size and growth. It appears fair to say that an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is on average associated with an annual lower growth rate of between one-half and one percentage point.
Let’s focus on the last sentence of the excerpt and contemplate the implications. The research cited above tells us that annual growth is 0.5 percentage point-1.0 percentage point lower if the burden of government rises by 10 percentage points of GDP. Well, the burden of federal spending has jumped by more than 5 percentage points of GDP during the Bush-Obama years, indicating that annual growth in America is now 0.25 percentage point-0.5 percentage point lower than it otherwise would be.
cato-at-liberty.org
Research shows that from the founding of our nation, 1787-1849 (63 years) federal spending averaged 1.7% of GDP. For the next 51 years, 1850-1900 (including fighting the Civil War) spending averaged only 3.1%. From 1901 till 1930 (including fighting WWI) it never reached 8%, and averaged approximately 3.2%.
At the height of the progressive movement (including FDR's New Deal) federal spending as a percentage of GDP never went above the 1934 level of 10.7%. Even after the historic 1944 (WWII) level of 43.6%, spending had fallen by 1948 to 11.6% of GDP.
In short, for the first 130 years of the U.S.'s 224 year existence, federal spending as a percentage of GDP averaged around 2.5%!
realclearmarkets.com
(Did the US not have succes for the first 130 years RW? - Tim)
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The USA wouldn't be the USA without the legal designation. It would just be land.
And it wouldn't be the US without the people. Realistically it wouldn't be so without the land and its history. It wouldn't be anything special without its commerce and it civil society (and in fact without the former we wouldn't be able to fund government in the first place). Also the legal designation, is distinct from the organization called the government.
The government is the government of a country, it isn't the country. |
