Conclusions and Policy Implications
Simply put, the debate about growth and government size is about the tradeoff between the size of a cake and its distribution. Expanding government to split a cake differently may prove unwise if it means that the cake to be divided will grow more slowly. The late Arthur M. Okun put it brilliantly in the title of his classic 1975 book, Equality and Efficiency: The Big Tradeoff. Some scholars have argued that no such tradeoff exists. For example, Lindert (2004) and Madrick (2009) have put forward arguments suggesting that the welfare state is “a free lunch” (the title of a Lindert working paper from 2003), and that research supports a “case for big government” (the title of Madrick’s 2009 book). We have shown that these conclusions are clearly premature. A negative correlation between various measures of government size and economic growth in rich countries is the most frequent result presented in the recent literature. Although increases in the economic standard of living do not necessarily translate one-to-one into increased social welfare, the correspondence is close enough to make economic growth an important policy priority. Yet clearly, for a number of reasons, a fairly large government sector relative to GDP is needed in today’s wealthiest countries. The government is, in practice, the only agent that can uphold private property rights and the rule of law, provide collective goods such as national defense and basic infrastructure, and deal with positive and negative externalities. Tanzi and Schuknecht (1997) deem that a level of public spending somewhere between 30 and 40 percent of GDP is sufficient. Countries with spending beyond this level do seem to have lower income inequality, but they do not score higher on social indicators such as life expectancy or infant mortality. Nevertheless, government spending in many OECD countries is closer to 50 percent of GDP. 51