Growth in the Real Size of Government since 1970
AbstractFrom at least 1893 economists have viewed income as an important determinant of government size and the hypothesis that government size increases with income is now enshrined in the literature as Wagner’s Law. More recently, however, public choice economists and growth theorists have tended to reverse that causality by questioning whether government size is a constraint on (or promulgator of) economic growth. Typically, increases in government size arising from increased consumption are viewed as constraints on growth, while increases in size that arise from government investment are viewed as positive in their effect on growth. In this paper we are concerned with the two-way interrelationship between government size and income growth highlighted by these separate literatures and investigate this relationship in three distinct stages. In the first part of the paper we set out what has actually happened to the real size of government for twenty OECD countries over the period since 1970 and survey some of the newer factors and approaches used to explain its more recent evolution. The second part re-estimates the parameters of the demand curve for government allows us to speculate whether the changing pattern of government growth represents a break in the structure of the model determining government size or, more simply, represents a change in the variation of the underlying variables. We find that the same model works at least as well as it did in earlier periods with coefficients that are close to their earlier estimates. We follow this by estimating a simple growth model that highlights the size of government consumption in relation to income and output growth for the same countries over the same time period. Increases in size do appear to constrain economic growth. The third part of our paper recognizes that while each of the two causal relationships has received considerable attention in their own right, less attention has been given to effecting a separation of their co-mingled effects. To do so, we estimate the two relationships simultaneously in the context of our panel. This allows us assess whether ignoring the simultaneity of the two-way relationship seriously biases the measure of either the income effect (in determining government size) and/or the measure of government’s effect on economic growth when each are estimated separately. While our discussion suggests that single equation estimates of the income elasticity in Wagner’s Law may have been biased upwards (in absolute terms) and the constraining effect of government size on growth biased downwards, our three stage estimates finds only modest support in the data. The paper concludes by exploring the interrelationship between government size and government regulation. In particular, we test the hypothesis that the appearance of slower growth in government side is due to the increased substitution of indirect control of private production for direct governmental output. On cross sectional data, we find the opposite. In our sample, larger government size is associated with more rather than less regulation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-30.
Date of creation: Sep 2001
Date of revision:
Contact details of provider:
Postal: 500 E. 9th Street, Claremont, CA 91711
Phone: (909) 607-3041
Fax: (909) 621-8249
Web page: http://www.claremontmckenna.edu/rdschool/papers/
More information through EDIRC
Other versions of this item:
- H1 - Public Economics - - Structure and Scope of Government
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
- Barro, R.J., 1988.
"Government Spending In A Simple Model Of Endogenous Growth,"
RCER Working Papers
130, University of Rochester - Center for Economic Research (RCER).
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1991. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
- Karras, Georgios, 1993. "Employment and Output Effects of Government Spending: Is Government Size Important?," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 354-69, July.
- Kristov, L. & Lindert, P. & Mcclelland, R., 1990.
"Pressure Groups And Redistribution,"
66, California Davis - Institute of Governmental Affairs.
- Coughlin, Peter & Nitzan, Shmuel, 1981. "Electoral outcomes with probabilistic voting and Nash social welfare maxima," Journal of Public Economics, Elsevier, vol. 15(1), pages 113-121, February.
- Payne, James E & Ewing, Bradley T, 1996. "International Evidence on Wagner's Hypothesis: A Cointegration Analysis," Public Finance = Finances publiques, , vol. 51(2), pages 258-74.
- Beck, Morris, 1979. "Public Sector Growth: A Real Perspective," Public Finance = Finances publiques, , vol. 34(3), pages 313-56.
- Diana Weinhold & James Rauch, 1997.
"Openness, Specialization, and Productivity Growth in Less Developed Countries,"
NBER Working Papers
6131, National Bureau of Economic Research, Inc.
- James E. Rauch & Diana Weinhold, 1999. "Openness, Specialization, and Productivity Growth in Less Developed Countries," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 1009-1027, August.
- Henrekson, Magnus, 1993. "Wagner's Law--A Spurious Relationship?," Public Finance = Finances publiques, , vol. 48(3), pages 406-15.
- Alberto F. Ades & Edward L. Glaeser, 1999.
"Evidence On Growth, Increasing Returns, And The Extent Of The Market,"
The Quarterly Journal of Economics,
MIT Press, vol. 114(3), pages 1025-1045, August.
- Alberto F. Ades & Edward L. Glaeser, 1994. "Evidence on Growth, Increasing Returns and the Extent of the Market," NBER Working Papers 4714, National Bureau of Economic Research, Inc.
- Alan T. Peacock & Jack Wiseman, 1979. "Approaches To the Analysis of Government Expenditure Growth," Public Finance Review, , vol. 7(1), pages 3-23, January.
- Folster, Stefan & Henrekson, Magnus, 1999.
"Growth and the public sector: a critique of the critics,"
European Journal of Political Economy,
Elsevier, vol. 15(2), pages 337-358, June.
- Fölster, Stefan & Henrekson, Magnus, 1997. "Growth and the Public Sector: A Critique of the Critics," Working Paper Series 492, Research Institute of Industrial Economics, revised 10 Jun 1998.
- Bohl, Martin T, 1996. "Some International Evidence on Wagner's Law," Public Finance = Finances publiques, , vol. 51(2), pages 185-200.
- Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
- Bird, Richard M, 1971. "Wagner's o Law' of Expanding State Activity," Public Finance = Finances publiques, , vol. 26(1), pages 1-26.
- Ram, Rati, 1986. "Causality between Income and Government Expenditure: A Broad International Perspective," Public Finance = Finances publiques, , vol. 41(3), pages 393-414.
- N. Gregory Mankiw & David Romer & David N. Weil, 1992.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Baumol, William J, 1972. "Macroeconomics of Unbalanced Growth: Reply," American Economic Review, American Economic Association, vol. 62(1), pages 150, March.
- Dani Rodrik, 1998.
"Why Do More Open Economies Have Bigger Governments?,"
Journal of Political Economy,
University of Chicago Press, vol. 106(5), pages 997-1032, October.
- Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
- Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
- Sam Peltzman, 1980.
"The Growth of Government,"
University of Chicago - George G. Stigler Center for Study of Economy and State
1, Chicago - Center for Study of Economy and State.
- Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
- Gandhi, Ved P, 1971. "Wagner's Law of Public Expenditure: Do Recent Cross-Section Studies Confirm it?," Public Finance = Finances publiques, , vol. 26(1), pages 44-56.
- Friedrich Schneider, 2000.
"The Increase of the size of the shadow economy of 18 OECD countries: Some preliminary explanations,"
Economics working papers
2000-08, Department of Economics, Johannes Kepler University Linz, Austria.
- Friedrich Schneider, 2000. "The Increase of the Size of the Shadow Economy of 18 OECD Countries: Some Preliminary Explanations," CESifo Working Paper Series 306, CESifo Group Munich.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Peacock, Alan & Scott, Alex, 2000. " The Curious Attraction of Wagner's Law," Public Choice, Springer, vol. 102(1-2), pages 1-17, January.
- James Enelow & Melvin Hinich, 1989. "A general probabilistic spatial theory of elections," Public Choice, Springer, vol. 61(2), pages 101-113, May.
- Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
- Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
- Robert J. Barro, 1980.
"Output Effects of Government Purchases,"
NBER Working Papers
0432, National Bureau of Economic Research, Inc.
- Dinopoulos, Elias & Thompson, Peter, 2000. "Endogenous growth in a cross-section of countries," Journal of International Economics, Elsevier, vol. 51(2), pages 335-362, August.
- Ganti, Subrahmanyam & Kolluri, Bharat R, 1979. "Wagner's Law of Public Expenditures: Some Efficient Results for the United States," Public Finance = Finances publiques, , vol. 34(2), pages 225-33.
- Islam, Nazrul, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1127-70, November.
- Magnus Henrekson & Johan Lybeck, 1988. "Explaining the growth of government in Sweden: A disequilibrium approach," Public Choice, Springer, vol. 57(3), pages 213-232, June.
- Stanley L. Winer & J Stephen Ferris, 2003. "Searching for Keynes: An Essay on the Political Economy of Fiscal Policy, with Application to Canada, 1870-2000 - revised version," CESifo Working Paper Series 1016, CESifo Group Munich.
- FranÃ§ois Facchini & Mickael Melki & Andrew Pickering, 2013. "The Labor Share and the Size of Government," Discussion Papers 13/02, Department of Economics, University of York.
- George Tridimas & Stanley L. Winer, 2004. "A Contribution to the Political Economy of Government Size: 'Demand', 'Supply' and 'Political Influence'," Carleton Economic Papers 04-04, Carleton University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.