Do big governments make a society poorer or politically authoritarian? We have all heard people argue that growing the government will turn us into the Soviet Union, pressing us all into two-hour lines at the local GUM to buy grey clothes and the family loaf of bread. People are quick to explain how a public healthcare is another step towards Chavez’s Venezuela. I struggled with these arguments while I studied neoliberalism. In the end, I concluded that these are extremely weak theories that gain credence by virtue of their endless repetition, and the fact that it is easy to get people to defer to you if you make your explanations long, boring, and complicated.
I find most arguments for this belief to be highly-speculative, often very abstract, and routinely plagued by slippery slope reasoning. Most importantly, the proposition that societies experience worse political or economic outcomes runs contrary to what is indicated by straightforward empirical comparisons. Always beware policy arguments that ask you to doubt straightforward empirics in favor of complicated, highly conjectural theories.
Empirically, wealthier and better-governed countries do not have smaller governments. If any relationship exists, it seems most likely that better-developed societies are more likely to channel proportionally more of their economic activity through governments. Consider the following comparisons of government spending, economic production, and governance quality metrics. These are just two of many empirics that can easily be produced. You can access the data here, and the Markdown file used to generate this report can be downloaded here.
This analysis examines the relationship between government spending (% GDP), the ratio of government spending to the value of all annual national economic production (GDP). Countries who score higher on this metric have governments to spend more money and hire more people, relative to the overall amount of economic activity that is occurring in an economy.
I consider two government spending metrics. Central Government Expenditures (% GDP) express the ratio of national-level government annual spending to GDP. These data are drawn from the World Development Indicators, accessed using the WDI R package. These data cover more of the world’s countries, but will underestimate government expenditures in political systems with major sub-national governments (e.g., as in the U.S. and Canada). Our data on General Government Spending (% GDP) combines central, state and local government spending, relative to national GDP. This data comes from the OECD and was accessed using the OECD R package. It covers a smaller sample of mostly wealthy countries.
Our analysis cover 157 countries with populations of at least one million people. Data is from 2017.
First, consider the relationship between government spending and per capita Gross Domestic Product (GDP). GDP roughly measures the money value of the economic production that takes place in a country. A country with higher GDP per person is engaged in higher value-added production activities, a sign that a society is generally wealthier and commands more purchasing power on global trade markets.
The figure below presents a scatterplot of central government expenditures (% GDP) and per capita GDP across our sample.
The pairwise correlation of these metrics is 0.18, suggesting a weak relationship. The graph can be interpreted as exhibiting no trend. However, the relationship could be stronger when we consider that the U.S., Canada, and Germany have decentralized government systems that underestimate the overall public sector’s size. That observation, coupled with the temptation to treat Timor, Lesotho, and Afghanistan as outliers, could press us to see a positive relationship if we squint. But these types of analytical moves are anti-conservative, and a fair and conservative appraisal is that the relationship between government spending and per captia GDP is weakly positive at best. It certainly isn’t negative though – richer countries clearly do not have smaller governments.
If we use consolidated government expenditures, which include state and local governments, the correlation is roughly the same, and the graph imparts a similar general conclusion.
The data make it clear that poorer countries do not have bigger governnments. Many of the countries with relatively larger governments are wealthier.
Below, we make a similar comparison between countries’ government spending and two metrics of governance quality from the World Bank’s World Governance Indidcators, which can also be accessed through the WDI package. I consider two indices. The first is the Voice and Accountability metric, which captures countries’ general rankings on international expert surveys that assess government system’s responsiveness and accountability to popular will. It is measured on a standardized scale, measured as standard deviations from the mean score (set at zero on this scale).
Again, when we look at general expenditures, the relationship holds. If anything more democratic systems have larger public sectors.
Rule of Law
This principle bears out over more development and governance metrics, but we will try one more comparison to establish the basic point that more government does not mean worse government. This comparison looks at the World Governance Indicators’ Rule of Law index, which captures the degree to which the law is universally applicable and evenly applied. Again, the same relationships hold.
Societies Get Bigger Governments as They Develop Economically
These relationships exhibit an empirical regularity known to economists as “Wagner’s Law” after the 19th-century economist, Adoph Wagner, to whom the observation that governments and economies grow together is attributed. Wealthier societies have bigger governments because these economies are more complex, with more moving parts to govern. They are also richer and have the resources to ensure higher living standards for everyone in society. If we are thinking about this issue with a strong empiricism and a leaning towards straightforward explanations, your inclination should be to be credulous about strong theories that government harms freedom and prosperity, unless you want to dwell on extreme and unlikely scenarios. If your goal is to make the U.S. economic regulation or social policy more like something they do in Northern Europe, don’t worry about it.