Does Bigger Government Drive Economic Growth?
It's a debate that's raged for decades: Does increasing the size of government boost economic growth, or does economic growth increase the size of government?
The stage for this politically-charged discussion was set many years ago by two European economists. In the early 1900s, British economist John Maynard Keynes argued that government spending, the most common proxy for government size, drives economic growth, especially during economic downturns. His ideas were put into action in the wake of the Great Depression and more recently after the Great Recession.
Years before, German economist Adolph Wagner noted that government spending tends to increase as economies expand, driven mostly by wealth redistribution and additional government programs. In his model, welfare states can often evolve from free market capitalism, as citizens look to government to spread the wealth from private industry.
Both Wagner's and Keynes' theories have been repeatedly put to the test over the years, but which is correct has been difficult to determine. With a new literature review published to the journal SAGE Open, University of South Africa economists Sheilla Nyasha and Nicholas M. Odhiambo sought to shed some light on the subject.
Unfortunately, pouring through the published science did not point to an obvious winner. Nyasha and Odhiambo found studies conducted on diverse economies that supported both theories.
"The causal relationship between government size and economic growth is not clear-cut," they wrote.
The duo did note, however, that Wagner's theory did enjoy the most support in the scientific literature. While they turned up six studies that supported the notion that government spending leads to economic growth, they found 22 that determined growth to drive spending.
Nyasha and Odhiambo also discovered a considerable number of studies that found a causal relationship in both directions, suggesting that Keynes and Wagner could both be correct in different circumstances.
Economies are extremely difficult behemoths to study, and there are inevitably differences in research methods and confounding variables that limit the scope of any finding.
It's safe to say that the debates about government spending and economic growth will persist in political and scientific circles for a very long time.
Source: Sheilla Nyasha and Nicholas M. Odhiambo. "Government Size and Economic Growth: A Review of International Literature." SAGE Open. September 20, 2019. DOI: https://doi.org/10.1177/2158244019877200