The futile quest for a grand explanation of long-run government expenditure
This paper carries out a critical reappraisal of the two contending theories purporting to explain long-run government spending: Wagner's Law and different variants of the ratchet effect. We analyze data spanning from the early 19th century until the present day in Sweden and the United Kingdom. Hence, in contrast to previous studies, we evaluate the validity of Wagner's Law and the ratchet effect hypothesis over a very long time period, starting at the beginning of industrialization. Cointegration analysis is used to investigate the long-run relationships between government expenditure and GDP, focusing on sub-periods and structural breaks. Moreover, we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment. According to our main results, Wagner's Law does not hold in the long run, although the data are consistent with Wagner's Law between roughly 1860 and the mid 1970s. This can be traced to the formation of the modern public sector, including the introduction of public education, health care, and so forth. Yet Wagner's Law did not hold during the initial industrialization phase (before 1860), and in recent periods GDP only affects the government spending share when we control for population age structure. Finally, we find some evidence of asymmetric adjustment in the UK, particularly in the post-WWII period. However, the ratchet effect is not a general cause of the growth of government spending.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Biehl, Dieter, 1998. "Wagner's Law: An Introduction to and a Translation of the Last Version of Adolph Wagner's text of 1911," Public Finance = Finances publiques, , vol. 53(1), pages 102-11.
- Engle, Robert F & Granger, Clive W J, 1987.
"Co-integration and Error Correction: Representation, Estimation, and Testing,"
Econometric Society, vol. 55(2), pages 251-76, March.
- Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Anisul Islam, 2001. "Wagner's law revisited: cointegration and exogeneity tests for the USA," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 509-515.
- Englund, P. & Persson, T. & Svensson, L.E.O., 1991.
"Swedish Business Cycles : 1861-1988,"
RCER Working Papers
275a, University of Rochester - Center for Economic Research (RCER).
- 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.
- Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
- Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
- Goff, Brian, 1998. " Persistence in Government Spending Fluctuations: New Evidence on the Displacement Effect," Public Choice, Springer, vol. 97(1-2), pages 141-57, October.
- North, Douglass C & Wallis, John Joseph, 1982. "American Government Expenditures: A Historical Perspective," American Economic Review, American Economic Association, vol. 72(2), pages 336-40, May.
- Henrekson, Magnus, 1993. "Wagner's Law--A Spurious Relationship?," Public Finance = Finances publiques, , vol. 48(3), pages 406-15.
- Lamartina, Serena & Zaghini, Andrea, 2008.
"Increasing public expenditures: Wagner's law in OECD countries,"
CFS Working Paper Series
2008/13, Center for Financial Studies (CFS).
- Serena Lamartina & Andrea Zaghini, 2011. "Increasing Public Expenditure: Wagner's Law in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 12(2), pages 149-164, 05.
- Philip R. Lane, 2002.
"The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD,"
Trinity Economics Papers
20022, Trinity College Dublin, Department of Economics.
- Lane, Philip R., 2003. "The cyclical behaviour of fiscal policy: evidence from the OECD," Journal of Public Economics, Elsevier, vol. 87(12), pages 2661-2675, December.
- Akitoby, Bernardin & Clements, Benedict & Gupta, Sanjeev & Inchauste, Gabriela, 2006. "Public spending, voracity, and Wagner's law in developing countries," European Journal of Political Economy, Elsevier, vol. 22(4), pages 908-924, December.
- Crafts, Nick, 1991. "Reversing Relative Economic Decline? The 1980s in Historical Perspective," Oxford Review of Economic Policy, Oxford University Press, vol. 7(3), pages 81-98, Autumn.
- Emmanuel Ziramba, 2008. "Wagner'S Law: An Econometric Test For South Africa, 1960-2006," South African Journal of Economics, Economic Society of South Africa, vol. 76(4), pages 596-606, December.
- Bohl, Martin T, 1996. "Some International Evidence on Wagner's Law," Public Finance = Finances publiques, , vol. 51(2), pages 185-200.
- Neil R. Ericsson & James G. MacKinnon, 1999.
"Distributions of error correction tests for cointegration,"
International Finance Discussion Papers
655, Board of Governors of the Federal Reserve System (U.S.).
- Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, 06.
- Neil R. Ericsson & James G. MacKinnon, 2000. "Distributions of Error Correction Tests for Cointegration," Econometric Society World Congress 2000 Contributed Papers 0561, Econometric Society.
- Andreas Bergh & Martin Karlsson, 2010.
"Government size and growth: Accounting for economic freedom and globalization,"
Springer, vol. 142(1), pages 195-213, January.
- Bergh, Andreas & Karlsson, Martin, 2009. "Government Size and Growth: Accounting for Economic Freedom and Globalization," Ratio Working Papers 130, The Ratio Institute.
- Folster, Stefan, 1997. "Social Insurance Based on Personal Savings Accounts: A Possible Reform Strategy for Overburdened Welfare States," Kyklos, Wiley Blackwell, vol. 50(2), pages 253-58.
- Jean Hindriks & Gareth D. Myles, 2006.
"Intermediate Public Economics,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262083442, June.
- Kristov, L. & Lindert, P. & Mcclelland, R., 1990.
"Pressure Groups And Redistribution,"
66, California Davis - Institute of Governmental Affairs.
- Michael Bergman & Stefan Gerlach & Lars Jonung, 1992. "External influences in Nordic business cycles, 1870â€“1988," Open Economies Review, Springer, vol. 3(1), pages 1-22, February.
- Sinn, Hans-Werner, 1998. "European Integration and the Future of the Welfare State," CEPR Discussion Papers 1871, C.E.P.R. Discussion Papers.
- Lindert Peter H., 1994. "The Rise of Social Spending, 1880-1930," Explorations in Economic History, Elsevier, vol. 31(1), pages 1-37, January.
- Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
- Ying-Foon Chow & John Cotsomitis & Andy Kwan, 2002. "Multivariate cointegration and causality tests of Wagner's hypothesis: evidence from the UK," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1671-1677.
- Alberto Alesina & Guido Tabellini, 2005.
"Why is fiscal policy often procyclical?,"
784828000000000465, UCLA Department of Economics.
- Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy Often Procyclical?," NBER Working Papers 11600, National Bureau of Economic Research, Inc.
- Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research.
- Alberto Alesina & Guido Tabellini, 2005. "Why is Fiscal Policy often Procyclical?," CESifo Working Paper Series 1556, CESifo Group Munich.
- Alberto Alesina & Filipe Campante & Guido Tabellini, . "Why is Fiscal Policy Often Procyclical?," Working Paper 248206, Harvard University OpenScholar.
- Alberto Alesina & Guido Tabellini, 2005. "Why Is Fiscal Policy Often Procyclical?," Working Papers 297, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Shelton, Cameron A., 2007. "The size and composition of government expenditure," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2230-2260, December.
- Oxley, Les, 1994. "Cointegration, Causality and Wagner's Law: A Test for Britain 1870-1913," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(3), pages 286-98, August.
- Henrekson, Magnus, 1990. "The Peacock and Wiseman displacement effect : A reappraisal and a new test," European Journal of Political Economy, Elsevier, vol. 6(2), pages 245-260, October.
- Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
- Gregory, A.W. & Hansen, B.E., 1992.
"Residual-Based Tests for Cointegration in Models with Regime Shifts,"
RCER Working Papers
335, University of Rochester - Center for Economic Research (RCER).
- Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
- Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
- Kevin Hoover & Stephen J. Perez, 2003.
"Data Mining Reconsidered: Encompassing And The General-To-Specific Approach To Specification Search,"
9727, University of California, Davis, Department of Economics.
- Kevin D. Hoover & Stephen J. Perez, 1999. "Data mining reconsidered: encompassing and the general-to-specific approach to specification search," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 167-191.
- Kevin D. Hoover & Stephen J. Perez, . "Data Mining Reconsidered: Encompassing And The General-To-Specific Approach To Specification Search," Department of Economics 97-27, California Davis - Department of Economics.
- Allan Meltzer & Scott Richard, 1983. "Tests of a rational theory of the size of government," Public Choice, Springer, vol. 41(3), pages 403-418, January.
- William Easterly & Sergio Rebelo, 1993.
"Fiscal Policy and Economic Growth: An Empirical Investigation,"
NBER Working Papers
4499, National Bureau of Economic Research, Inc.
- Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
- Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
- Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
- Assar Lindbeck, 1997. "The Swedish Experiment," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1273-1319, September.
- Michas, Nicholas A, 1975. "Wagner's Law of Public Expenditures: What Is the Appropriate Measurement for a Valid Test?," Public Finance = Finances publiques, , vol. 30(1), pages 77-85.
- Lindert, Peter H., 1996. "What Limits Social Spending?," Explorations in Economic History, Elsevier, vol. 33(1), pages 1-34, January.
- Lindbeck, Assar, 1976. "Stabilization Policy in Open Economies with Endogenous Politicians," American Economic Review, American Economic Association, vol. 66(2), pages 1-19, May.
- Jennifer Castle & David Hendry, 2008.
"The Long-Run Determinants of UK Wages, 1860-2004,"
Economics Series Working Papers
409, University of Oxford, Department of Economics.
- Ghate, Chetan & Zak, Paul J., 2002.
"Growth of government and the politics of fiscal policy,"
Structural Change and Economic Dynamics,
Elsevier, vol. 13(4), pages 435-455, December.
- Chetan Ghate & Paul J. Zak, . "Growth of Government And The Politics of Fiscal Policy," Claremont Colleges Working Papers 2000-19, Claremont Colleges.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Thomsson, Kaj, 2010. "Public and Private Welfare State Institutions: A Formal Theory of American Exceptionalism," Working Paper Series 822, Research Institute of Industrial Economics.
- Cameron A. Shelton, 2007. "The Size and Composition of Government Expenditure," Wesleyan Economics Working Papers 2007-002, Wesleyan University, Department of Economics.
- Randall Holcombe, 2005. "Government growth in the twenty-first century," Public Choice, Springer, vol. 124(1), pages 95-114, July.
- Santos, Carlos, 2008. "Impulse saturation break tests," Economics Letters, Elsevier, vol. 98(2), pages 136-143, February.
- Ram, Rati, 2009. "Openness, country size, and government size: Additional evidence from a large cross-country panel," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 213-218, February.
- Alan T. Peacock & Jack Wiseman, 1961. "The Growth of Public Expenditure in the United Kingdom," NBER Books, National Bureau of Economic Research, Inc, number peac61-1, March.
- Andreas Bergh, 2005. "On Inter- and Intra-Individual Redistribution of the Welfare State," Social Science Quarterly, Southwestern Social Science Association, vol. 86(s1), pages 984-995.
- Bagala Biswal & Urvashi Dhawan & Hooi-Yean Lee, 1999. "Testing Wagner versus Keynes using disaggregated public expenditure data for Canada," Applied Economics, Taylor & Francis Journals, vol. 31(10), pages 1283-1291.
- Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:95:y:2011:i:7-8:p:708-722. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.