Prelude to the 'Big Government' series

I have been wanting to write about the role of government in economic development, especially the question of if big government hampers or helps economic growth for quite some time now. Because I studied economics at school and have an interest in these topics, and given that the current state of economic conditions around the world has given rise to a lively discourse on the public economy, this question has never been more relevant.

I want to take a stab at addressing this in the blog series which I am calling ‘Big Government’. I intend to give examples of countries where big government has been extremely successful in increasing prosperity and growth, and then some where it has inhibited growth. For the former, the Nordic states, as well as Austria, and The Netherlands come to mind. While big government in Japan a few decades ago created a lot of inefficiencies and hampered growth.  

Although there is a lot of literature out there arguing that big government stunts economic growth – including a recent World Bank report (2012), and another study conducted by the European Central Bank called ‘Economic Performance and Government Size’ that made the same conclusion – I still believe in its virtues. But I am open to how my ‘Big Government’ series may change my opinion.

As an introduction to the series, I want to talk a bit about the economic role governments are expected to play in democratic countries in the private sector. Their role is to correct for “externalities” – i.e. rewarding the private sector for positive externalities in the form of tax cuts, or subsidies; and conversely, punishing the private sector for negative externalities in the form of taxes.  The revenue collected from taxes is then spent to increase the welfare of citizens.

 

For the purpose of this series, having a big government, therefore, primarily means having a welfare state; i.e. you allocate a substantial share of GDP to transfer programs that spend on safety nets and human investment. A big government does not mean a protectionist, freedom inhibiting, and welfare reducing government. You can have a state that spends a sizeable share of its GDP (according to some sources, this share is 15% or more) on social programs and still be an open and a growing economy - but just a more equitable economy. Over the last decade for instance, U.S. public social spending increased from less than 15% of GDP to almost 19.5% of GDP in 2012 (Source: OECD). The Nordic states have had the highest social spending rates in the world for decades without negatively impacting their growth or prosperity. This said, it is worth looking at some key socio-economic indicators to compare across welfare and ‘non-welfare’ states and see where the differences start to matter for policy planners and decision makers.

My first case study will be on the Nordic economies. Hurrah!