Does Aggregate Government Size Effect Private Economic Performance in Canada?

This paper asks whether comprehensive, non-interest government size has an inverted Ushaped effect on private economic output in Canada and whether its current size is too large relative to the estimated tipping point. Using data from 1929 through 2011 and controlling for both correlations arising among the independent variables across time and endogeneity in the relationship between size and performance, we find evidence consistent with size producing an inverted U-shaped effect on private output that peaks in the range of 30 to 34 percent of GDP. Use of graphic nonparametric methods, conditional on the same control and instrument variables, reinforces the parametric estimates of threshold and quadratic models while illustrating visually the effect of controlling for endogeneity through instrumented variables.