Heres a long excerpt from an article I posted on liberty.me on Jan 8, for those who for some reason believe that I dont believe that I am a classical liberal in favor of smaller government: Proponents of larger government seem to think it is a cure for economic ills such as slow growth or persistent unemployment. However, as I noted in an article for the Foundation for Economic Education, research shows that in wealthy countries, further government spending leads to slower economic growth, even when the possibility of reverse causality is taken into account. A survey of the evidence on the subject undertaken by Swedish economists Andreas Bergh and Magnus Henrekson states, “The research is rather close to a consensus: the correlation [between government size and economic growth] is negative, and the sign seems not to be an unintended consequence of reverse causality.” And a World Bank study on the relationship between government size and economic well-being in Europe concluded, “Make government more efficient, or make it smaller.” It may be desirable for developing countries to limit the size of their governments as well, as it may be inhibiting their progress in poverty reduction. Research has shown that “important indicators of economic freedom such as openness to trade and small size of the government are robustly associated with poverty reduction.” A paper by the International Monetary Fund corroborates this finding and notes that while bigger governments are associated with less income inequality, they are associated with slower economic growth and ultimately slower poverty reduction. In 2013, economist Livio Di Matteo of the Fraser Institute, a Canadian think tank, published important research attempting to pinpoint the size of government (measured as government spending as a share of GDP) that maximizes economic growth. Using data from 70 countries over the period 2000–2011 and controlling for the effects of numerous other relevant variables, Di Matteo found that “annual per capita GDP growth is maximized at 3.1 percent at a government expenditure to GDP ratio of 26 percent; beyond this ratio, economic growth rates decline.” For reference, in the United States, government spending as a share of GDP was over 40 percent in 2012. This ratio exceeded 50 percent in countries such as France, Denmark, and Sweden. Thus, these countries are at the point where their governments’ size and scope are likely detrimental to economic growth — and consequently detrimental to the advancement of the populace’s standard of living.” Excessive government spending may also produce higher levels of unemployment. Two economists from the University of Delaware, Burton Abrams and Siyan Wang, used data from 20 developed countries over three decades to examine how government spending as a share of GDP affects the unemployment rate (when accounting for other relevant factors). They found: “That increases in government outlays hamper economic growth and raise the unemployment rate. Moreover, different types of government outlays are found to have different effects on growth and unemployment, with transfers and subsidies having a larger effect than government purchases. In addition, Granger causality tests suggest unidirectional causation from government outlays to economic growth and the unemployment rate.” These findings are notable because they don’t just establish a correlation; they use causality tests to find that government spending causes higher unemployment, not the other way around. Moreover, scholars have examined the relationship between public employment and private employment. Using data from a sample of developed countries over the years 1960 to 2000, European researchers found, “On average, [the] creation of 100 public jobs may have eliminated about 150 private sector jobs, slightly decreased labour market participation, and increased by about 33 the number of unemployed workers.” Similarly, 2013 paper by the International Monetary Fund came to the following conclusions: “High rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates … Public-sector hiring: (i) does not reduce unemployment, (ii) increases the fiscal burden, and (iii) inhibits long-term growth through reductions in private-sector employment.” All this evidence suggests that bigger government isn’t the solution to persistent unemployment. In fact, there is reason to believe that bigger government results in undesirable employment outcomes. All referenced studies can be found here: beingclassicallyliberal.liberty.me/2015/01/08/taking-on-capitalisms-detractors/
Posted on: Tue, 20 Jan 2015 00:05:00 +0000
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