Growth and Government

Professors James Gwartney and Randall Holcombe, economics professors at Florida State University and Robert Lawson, an economics professor at Capital University in Columbus, Ohio have just completed a report for Congress' Joint Economic Committee. The title is The Size and Function of Government and Economic Growth. The report points out, as just about every American knows, the expansion of the U.S. economy has now moved into its eighth year. It's been 15 years since a major recession. That's the good news.

Despite this performance, the real rate of economic growth during the 1990s is less than half that achieved in the 1960s. In fact, our average rate of growth has fallen during each of the last three decades. Greater economic stability, but less rapid growth, has also been the pattern of other developed nations. Gwartney, Holcombe and Lawson, using data from 60 nations, produce convincing evidence that there's a strong negative relationship between the size of government, increases in government expenditures and economic growth. In the case of our country, the authors conclude: if government expenditures, as a percent of gross domestic product (GDP), had remained at their 1960 level, the 1996 GDP would have been $9.16 trillion instead of $7.64 trillion. That translates into $23,440 additional income for the average family of four.

The authors also compared developed countries with the smallest increases in the size of government between 1960 and 1996 to those with the largest increases and looked at their growth rates. In 1960, government spending as a percentage of GDP in the U.S., Iceland, Ireland, United Kingdom and New Zealand averaged 28.9 percent. The growth rate for those countries in 1960 averaged 4.3 percent. In 1996, government spending in those countries rose, averaging 39.1 percent, and their growth rates fell, averaging 2.7 percent.

Developed nations with the largest increases in government size between 1960 and 1996 were Portugal, Spain, Greece, Finland, Sweden and Denmark. In 1960, those governments spent an average of 28.1 percent of their GDP and their growth rates averaged 6.4 percent. In 1996, government spending averaged 54.5 percent of GDP and their growth rates fell to an average of 1.2 percent. From their statistical estimates, Gwartney, Holcombe and Lawson show that for each 10 percent increase in government spending, there's a one percent decrease in the rate of growth.

The authors are not anarchists; they acknowledge an important critical role for government namely that of providing the legal and physical infrastructure for the operation of the market and a limited set of public goods to provide a framework conducive to economic growth. However, as governments move beyond these core functions they adversely affect economic growth through: the disincentive effects of taxation, diminishing returns as government takes on activities for which they are ill-suited, and government interference with the wealth creation process. Governments aren't as effective as markets in adjusting to changing circumstances and discovering innovative production methods.

The Gwartney, Holcombe and Lawson study understates government size because they don't take into account its regulatory burden. But even with this minor shortcoming, will the study's persuasive argument and evidence lead Congress to reduce government size? I doubt it. The reason is that it is impossible for any of us to know or appreciate how much wealthier we would have been had government expenditures remained where they were when John Kennedy was president. In other words, how can a family of four know that it is $23,440 poorer because of Washington and their state and local governments?

Walter E. Williams

C23-98

May 3, 1998