|Montréal, 4 mars 2000 / No 57||
(Source: Statistique Canada)
Libertarians knew it already, but now there is empirical evidence to support it: big government acts as a break on economic growth. The higher the level of public spending in a given country, the lower its growth rate tends to be.
Recent studies prove beyond doubt that there is a negative correlation between these two factors. One of the researchers who has done work on this topic, professor Robert Lawson of Capital University in Ohio, was recently in Montreal to promote his findings.
What he and his colleagues found is that spending on a few necessary core areas of government functions should not exceed about 15% of GDP (as shown in the margin on this page, the last time that was the case in Canada was in... 1926!). Beyond that, nationalized services, redistributive programs and intervention in the private sector only serve to impede the overal efficiency of the economy and retard growth.
In a study first published by the Cato Journal (et maintenant disponible en français sur le site de l'Institut économique de Montréal), Lawson et al. looked at the relationship between government spending and economic growth in a number of countries between 1960 and 1996. They found that in cases where a nation had government expenditures of less than 25 percent of GDP, the average growth rate was 6.6; between 25 and 30%, the rate of growth is down to 4.7; between 30 and 40%, to 3.8; between 40 and 50%, to 2.8; and finally, when spending exceeds 50% of GDP, the average growth rate is 2.0 or lower.
All the evidence points in the same direction: larger government means slower growth. This can be seen not only as expenditures increase, as they have in most countries since 1960, but also in the few cases (England, Ireland, New Zealand) where they have gone down. In these countries, the reduction in the size of government was followed by an increase in the growth rate. Ireland went from being the poor man of Europe to being its
Robert Lawson is also the coauthor of The Economic Freedom of the World 2000 Report, published by the Fraser Institute and other think tanks around the world. Le QL talked to him after a conference in February organized by the Montreal Economic Institute.
AN INTERVIEW WITH ROBERT LAWSON
Martin Masse: Can you tell us in a few sentences what is the gist of your argument about the relationship between the size of the state and growth?
Robert Lawson: The argument basically is that government can do certain things that help the operation of a market economy, without which market economies don't seem to function well; enforcement of contracts and property rights seem to be pretty important prerequisites for the operation of markets. But what you find is that in the real world, almost all governments, and indeed all governments, have gone way beyond this sort of minimal involvement in the economy and they've gone into areas that directly compete with market economies. And what has happened there I think is that as governments have expanded into these non essential areas, that's affecting the real economy and certainly people are poorer. So I think the general lesson is that larger-size governments, to the extent that they get beyond their basic functions, do this at a price, and the price comes in the form of lower rates of economic growth.
MM: Is it the first time that this has been demonstrated statistically or in a more formal way? As libertarians, we've known that, at least we could ascertain that logically, for a long time.
RL: I wouldn't necessarily call it the first time but in the last five or ten years, a small group of researchers, which I'm part of I guess, have started to look at this and the reason we've been able to look at it is because of the data. Quite literally, until the 1980s, good comprehensive data for a large number of countries on simple things like GDP, taxation level, spending, were unavailable. The quality was so poor that any statistical work on them was impossible. What's happened is that in the last twenty years or so... you're right, the argument has been around for... you go back to Adam Smith, two hundred years, but the ability to really investigate this empirically is something that only came about recently.
Could it be also that there was no real example of countries that had significantly
cut the size of the state?
Are you confident that this could happen?
MM: They adapt to these new circumstances.
RL: That's right. They no longer are as hostile. In the United States – I don't know about Canada but I assume it is the case – the growth of stock ownership is radically changing the views of people. They're no longer just workers, they're also shareholders. They follow the stock markets with as much zeal as the rich. If the government does something that affects their portfolios, they're going to be uptight, and they are! Their ideologies are changing to reflect the new world economy. I like to think, being an academic, that I can convince people on the merits of a smaller government, but if this doesn't work, I still think we have a pretty good shot here in the next fifty to a hundred years of rolling back government because of the new global economy.
Back to 1900
MM: Let me be the devil's advocate here. You say we should go back to how it was a hundred years ago, when governments were spending only 10 to 15% of GDP, but we were poor at that time. Somebody could say you want to return to the same conditions, with exploitation of workers, etc.
RL: Well, we weren't poor in 1900 because governments were small, we were poor in 1900 because productivity was low, technology, know-how, was low. It was growing fast, but we weren't poor because government was small. My thesis is that we've gotten rich despite the growth of government, that in fact, had the government not grown as fast, we would be richer today. And we can illustrate that, the numbers indicate that when our governments get larger, they are doing relatively poorer. Everybody is still getting richer, the growth of government hasn't stopped the wealth creation process, but it has slowed the wealth creation process. If we make government small today, we're not going to forget how to make cars. If you look back at 1900, we didn't know how to make cars, literally, no one knew how to make cars. The knowledge of how to make a car did not exist. Now it does. If government gets small today, that won't disappear, but the economy will grow faster.
The English legal tradition
When we look at your list of countries, we notice that English-speaking
countries, Great Britain, the United States, Australia, New Zealand, Ireland,
Canada to a lesser extent, are the countries where the size of the state
is lowest, whereas if you look at continental Europe especially, you get
into the upper 40, 50 or even 60% of GDP spent by governments. Does this
mean that if there is no major change, if we look at the next twenty or
thirty years, the English-speaking countries will remain the major economic
forces in the world and that this trend will become even more pronounced?
For a society like Quebec, this is a crucial issue I would say! Should
we hitch ourselves to the rest of the continent or look to other models?
I don't know that speaking English makes you rich, I'm sure it doesn't!
But it's not the speaking of English or anything like that that matters,
it's these institutional arrangements, the English common law, the protection
of property, enforcement of contracts and so on. You and I have a contract,
if it cannot be enforced by law it's very difficult to run a business.
In many parts of the world, business contracts are de facto unenforceable,
so businesses don't follow contracts. It's really not rocket science. In
large parts of the world, land titles don't exist, so you can't borrow
money. If you don`t have a land title, no banker will lend you money. These
are what I call the core functions of government, the provision of a system
for recording titles.
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