Government Size and Implications for Economic Growth

April 29, 2010

The expansion of government under the policies of the Bush and Obama administrations is prompting many Americans to ask how much government is too much. No one denies needing government services of all kinds, but what are the trade-offs?  Can there be too much government?

One way to answer that question is to examine the influence of the size of the government on economic growth.  In a new book to be published next month by the American Enterprise Institute, the Swedish economists Magnus Henrekson and Andreas Bergh survey the academic literature on the subject and find a negative correlation between the size of government and the rate of economic growth in rich countries (the book will be the subject of a discussion and debate in early May; details found here). 

What difference might it make?  If it is true that large government reduces economic growth, consider what the authors point out:  

“From one year to the next, the difference between annual economic growth at 2 percent or 2.5 percent is important enough, since it means several billions of dollars, more or less, in the hands of both households and politicians. From a longer perspective, the level of annual growth of GDP per capita is even more important: It ultimately determines which countries will grow rich and which will become or remain relatively poor… an annual growth rate of 2 percent means that the economic standard of living doubles in thirty-six years. But if the annual growth is instead 3 percent, a doubling of the standard of living takes a mere twenty-four years."