Government Size and Implications for Economic

As economists and policymakers strive to understand the causes of the global financial crisis, pinpointing the relationship between government size and economic growth is crucial. In this comprehensive evaluation of existing economic research, Andreas Bergh and Magnus Henrekson find that in wealthy countries, where government size is measured as total taxes or total expenditure relative to gross domestic product (GDP), there is a negative correlation between government size and economic growth; where government size increases by 10 percentage points, annual growth rates decrease by 0.5 to 1 percent.

Andreas Bergh is a research fellow at the Ratio Institute in Stockholm, Sweden, where he researches welfare state reform and institutional economics. Bergh is affiliated with Stockholm's Research Institute of Industrial Economics. Magnus Henrekson is president of the Research Institute of Industrial Economics in Stockholm, Sweden, and was formerly Jacob Wallenberg Professor of Economics at the Stockholm School of Economics. His research focuses on institutional determinants of entrepreneurial activity and explanations for cross-country differences in economic performance.

List of Illustrations	p. vii
Acknowledgment	p. ix
Introduction: Why Growth is Important, and why Government size May Matter	p. 1
How do we know if Big Government is Good or Bad for Growth?	p. 7
Why Seemingly Clear Evidence May be Insufficient	p. 7
Theoretical Expectations: Should we Expect Big Government to be Good or Bad for Growth?	p. 12
Arguments Pointing toward a Positive Link between Government Size and Growth	p. 13
Arguments Pointing toward a Negative Effect	p. 16
Weighing the Positive against the Negative Effects	p. 17
What do Existing Studies Show?	p. 19
Early Cross-Country Studies	p. 20
More Sophisticated Studies A: Bayesian Averaging of Classical Estimates (BACE)	p. 24
More Sophisticated Studies B: Fixed Effects Panel Studies	p. 26
Combining BACE with Panel Data	p. 29
Is the Negative Correlation Due to Reverse Causality?	p. 31
Results from Other Research Explaining Growth	p. 34
Concluding Remarks	p. 34
The Growth Effects of Institutional Quality	p. 36
Why do Institutions Matter?	p. 37
The Surprising Correlation between Big Government and Reforms Furthering Economic Freedom	p. 39
Conclusion: Not Only Size Matters	p. 42
Deficient Marketization of Household Production in High-Tax Societies	p. 44
Conclusions and Policy Implications	p. 51
Policy Implications in General	p. 52
Should Government Be Allowed to Grow in the United States?	p. 54
Notes	p. 57
References	p. 61
About the Authors	p. 69
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Government Size and Implications for Economic Growth

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