A new, freely-available data set measuring countries’ conformity to free market/socialist ideals.
Tired of the old, impressionistic, non-rigorous Venezuela vs. Norway arguments about socialism? Would you like to make systematic comparisons based on empirical data?
Joseph van der Naald and I are happy to share Measuring Socialism, a data compilation of 240+ variables that measure of 43 countries’ semblance to free market/socialist ideals. You can use these data to develop empirical assessments of countries’ economic systems, and then test propositions linking socialism or free markets to political, economic or social outcomes.
Governments are big compared to the 19th century, but their size has generally been stable over the past several decades, except perhaps in the US.
Many economic policy arguments portray the public sector as having grown to be very large – perhaps even excessively so. This factual claim sets the groundwork for policy reforms designed to shrink the public sector. How big are public sectors today? Are they unprecedentedly large, as austerity advocates often claim? Or have governments been downsized in the era of neoliberalism? In this analysis, we examine changes in government expenditures since the 19th century.
This analysis uses government expenditures (% GDP) data from Mauro et al.’s (2013)1 Public Finances in Modern History database2 This metric gives a rough estimate of how much the government spends relative to economic production. A higher number suggests that the government is larger relative to the economy under its jurisdiction.
Today’s U.S. government are large by historical standards. Public sectors are several times larger than they were before the Great Depression and World War II. Since the 1950s, the public sector appears to have been growing steadily. Growth was considerable during the 1960s through mid-1980s, and experience a slowdown during the 1990s and 2000s. After 2007, US public expenditures rose rapidly. Figure 1 shows changes in the ratio of government expenditures to GDP since 1800 for the United States:
Note that, even during the Civil War and WWI, government expenditures were a fraction of their present-day levels. Spending in 2013 was nearing peak spending levels during World War II. Since 2013, government expenditure to GDP levels have fallen to around 38% (not depicted in these data).
US is not Unique. The U.S. is not unique. It’s experience is typical of highly developed countries. Consider Figure 2 (below), which shows similar plots of several other countries for which long-term data was available. All countries experienced considerable growth in government after World War II, but the pace of that growth had been arrested by the 1980s:
Note that, while the US figure gives a stronger indication of a post-1980 growth trajectory, its overall levels are lower relative to most of these other countries.
Governments grew considerably after the Great Depression and World War II. This growth seemed particularly intense in the 1960s and 1970s, but eventually this growth was halted in the 1980s. The data suggest that government spending has been reasonably stable in most countries since 1980, although spending did rise temporarily in the US after their economic crisis. So, compared to 19th century America, the US has a huge and expansive government. By modern standards, its government is comparatively small, and government spending has been relatively stable across rich countries since then.
Distributed by the International Monetary Fun as “Public Finances in Modern History Database, 1800 – 2011”, data and documentation available for download at https://www.imf.org/external/np/fad/histdb/ and on this project’s online depository↩
The bivariate relationship between government expenditures (% GDP) and World Governance Indicators, 2015
A common argument against socialism is that it paves a path to corruption and authoritarianism. In essence, it is a political argument based on an assertion that an enlarged government decreases society’s governance quality, or puts society at greater risk of a collapse in governance quality. Governance quality is a technical term in the development literature whose meaning closely resembles the more popular political concept of “good government”. It refers to the degree to which a government is stable, rule-bound, competent, publicly accountable, and acts in accordance with the public interest.
With all due deference to the scenarios dreamed up by Friedrich Hayek, is there anything to this argument? You should not base your beliefs on whether it is endorsed by someone who is famous or respected, but rather whether or not you see evidence that the argument is true. This analysis looks at bivariate relationships between government expenditure levels and countries scores on the World Bank’s World Governance Index.
Our findings suggest countries with larger governments tend to be better governed, perhaps in part because better developed economies tend to have bigger governents.
To probe the relationship between big government and bad governance, I draw on World Bank data. Size of government is measured by government expenditures (% GDP).1 The measurement strategy is based on the notion that a government that provides more services, performs more functions, or assumes an expanded purview will require more supplies, labor, and other resources. To measure governance quality, we consdier four metrics from the World Governance Indicators:2 Voice and Accountability, Political Stability and the Absence of Violence, Rule of Law, and Concrol of Corruption. These data are based on meta-analyses of survey data caputring experts’, businesspeople’s, diplomats’ and others’ opinions on countries governance quality. All of these variables are measured on standardized scales, with mean = 0 and SD = 1. We look at data from 2015.
We review the results of four comparisons. A point to note: Readers might not that Switzerland, Canada, and the United States register government expenditure levels that appear to be low. These figures likely exclude these governments’ sizable subnational government spending. These measurement issues are likely to understate the strength of our results: that countries with bigger governments tend to be better governed as well. Note that all these figures exclude micro-states (i.e., with populations of less than one million).
Voice & Accountability
Our first figure presents the relationship between govenrment expenditures and the WGI’s Voice and Accountability Index.This index captures “perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.”
The figure immediately gives us a sense of this relationship. Given that better-developed or wealthier countries tend to have larger governments3, it makes sense that countries with larger governments are also perceived to have more accountable, more democratic governments. This is a fairly strong correlation of 0.51
Political Stability & the Absense of Violence
Political Stability & the Absence of Violence, which measures “perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism.” This figure visualizes a correlation of 0.21
Rule of Law
Rule of Law, which captures “the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.” Corrlation: 0.39.
Control of Corruption
Control of Corruption, which measures “perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as”capture” of the state by elites and private interests.” Correlation: 0.36
These findings do not strongly establish the view that bigger governments improve governance, but they certainly cast doubt on the proposition that bigger governments lead to worse governance. Better developed, wealthier countries tend to have bigger and better functioning governments.
Anyone who wishes to make the case that big government leads to worse governance needs to explain how their view can be maintained despite the fact that a straightforward comparison suggests that the opposite is true.
A look at the distribution of government revenues to GDP.
One often hears arguments that America’s government is too large. People evoke the imagery of a bloated, gluttonous, over-reaching, and domineering public sector as a justification for policy reforms that cut taxes on businesses, privatize public assets or enterprises, deregulate markets, and cut social programs. In this note, I probe the proposition that the United States’ public sector is large through an examination of government tax statistics.
Assessing Public Sector Size through Expenditures
The analysis uses tax revenues (% GDP) to estimate the size of the U.S. public sector. Tax revenues capture “the amount of money that governments spent on good and services, including supplies and labor.”compulsory transfers to the central government for public purposes.” We scale this figure to countries’ GDP, to get a sense of federal government taxes levels relative to overall economic activity (as proxied by value-added output). So a country with a high score has a government that collects a lot of money relative to the size of the economy under its jurisdiction. We can infer that its central government is large compared to a country with a public sector that spends at comparatively low levels.
I use data from the World Bank’s World Development Indicators.1 We use 2015 data, because it renders a good balance between recency and low missingness. Figure 1 (below) depicts the distribution of tax hauls:
Distribution of Tax Revenue to GDP across Countries, 2015
The size of the U.S. public sector looks less low-but-typical when we compare it against other wealthy countries. Consider the second figure below, which presents a scatterplot of government expenditures (% GDP) to per capita GDP levels (all data from the World Bank). A blue line depicting the results of a bivariate regression are superimposed. We distinguish OECD members in blue.
There are 103 countries represented in this figure, with the bins set at intervals of 2.5 percentage points. In this data, the United States registers a tax to GDP ratio of 11.2%. This is below our sample mean of 16%, but within one standard deviation (SD = 6.6%). The figure suggests that a typical government size, as measured by taxes (% GDP), is 10 to 22 percent. In other words, governments typically spend the equivalent of one-tenth to one-quarter of their national economic output.
The relationship is positive, suggesting that more developed countries have larger public sectors. The figure is illustrating a well-known concept in public finance called Wagner’s Law, although the law itself refers to spending rather than revenue. Taxes and spending roughly track each other. The Law, named after turn-of-the-20th century economist Adolph Wagner, posited that the increasing sophistication of modern economies require that a government assume more functions or jobs to keep markets running and sustain people’s economic wellbeing. As our economy becomes larger and more complex, then society comes to depend on more government services to keep itself running. There is no need for a pharma, nuclear power, or derivatives markets regulators if there is no pharma, nuclear, or derivatives industry. There was less need for Social Security when we died younger. We didn’t need public investments in higher education when virtually everyone farmed for a living.
Consolidated Government Expenditures
One problem with the World Development Indicators’ data is that it does not include the tax burden levied by all levels of government. When making global comparisons, this tends to render reasonably fair comparisons, because sub-national government taxes are generally not substantial. However, these burdens are substantial in the United States (as well as Canada and Switzerland), where the central government has devolved many of its operations. We are able to make these comparisons with some degree of confidence among the wealthy countries using data from the OECD’s Government Revenue Statistics2. We are looking at total tax revenues (% GDP) for 2015.
Again, U.S. tax levels are near the bottom of the OECD, and only surpass levels of newer, lower-income members who only recently gained accession to the organization.
Americans’ Tax Burden
From this vantage point, the U.S. government seems to spend seems well below what one would expect, given its high levels of wealth. It’s government a pretty big for a poor country, but quite small for a wealthy country. This lends itself to an interesting interpretation of society’s choice about socialism versus capitalism. Were America to dramatically increase the size of its government, it would still register as quite typical among wealthy countries. However, were it to really reduce the size of its government, it would be a more extreme outlier. The position to cut government is the radical ones, given that the vast majority of developed countries have had much larger public sectors.