Don’t Judge a Nation by the Size of Its Government

A recurring issue in the political debate is that of big or small government. From the political right, big government is invariably seen as an objectively bad thing. It breeds corruption and it lulls hard working citizens, and especially minorities, into a false sense of entitlement. It leads to public overspending and fiscal disaster. The left are not crazy about framing the debate in the big versus small dichotomy. They could say that big government means social security, public schools, infrastructure and so on. But since most people are naturally suspicious of the government, the term “big government” will never have a good ring to it. It just sounds too much like Big Brother (and sometimes it is). Recently president Obama even went as far as to say the following in his State of the Union speech,

It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

And he is a big government guy!

This got me thinking. Is the size of the government really objectively good or bad? There are no official measures the government size (that I know of at least) but I think total tax revenues as a percentage of the GDP could be a reasonable proxy.  I selected 38 countries that are comparable in terms of development, that is most countries in Europe and USA, Canada, Australia, and the richer countries in East Asia. I omitted really small countries since they would affect the result disproportionally. That gave me a list of 38 countries listed below, in order of size (biggest first),

  1. Denmark 49.0
  2. Sweden 47.9
  3. Belgium 46.8
  4. France 44.6
  5. Finland 43.6
  6. Norway 43.6
  7. Austria 43.4
  8. Italy 42.6
  9. Germany 40.6
  10. Netherlands 39.8
  11. Slovenia 39.3
  12. Hungary 39.1
  13. United Kingdom 39.0
  14. Spain 37.3
  15. Argentina 37.2
  16. Portugal 37.0
  17. Russia 36.9
  18. Israel 36.8
  19. Czech Republic 36.3
  20. New Zealand 34.5
  21. Poland 33.8
  22. Estonia 32.3
  23. Canada 32.2
  24. Australia 30.8
  25. Ireland 30.8
  26. Latvia 30.4
  27. Greece 30.0
  28. Slovakia 29.5
  29. Switzerland 29.4
  30. Japan 28.3
  31. United States 26.9
  32. Korea, South 26.8
  33. Croatia 26.6
  34. Belarus 24.2
  35. Lithuania 20.9
  36. Chile 18.6
  37. Singapore 14.2
  38. Hong Kong 13.0

Next, I looked up some key indicators of how well a country is doing:

1. GDP (PPP) per capita (IMF 2010-11)

2. Gross government debt as a percentage of GDP (IMF 2011)

3. Corruption Perceptions Index (CPI) from Transparency International (2012).

4. Murder rate by country according to UNODC, most recent year.

I chose murder rather than crime in general since it’s a more robust measure than lesser crimes that will be reported in varying degrees in different countries.

And then I did the scatter plots. Starting with GDP (PPP) per capita (IMF 2010-11),

Government size/tax burden on the x-axis and GDP (PPP) per capita on the y-axis.

Government size/tax burden on the x-axis and GDP (PPP) per capita on the y-axis.

As you can see there is practically no correlation at all, a negligible 0.04. Next the public debt, does big government lead to fiscal irresponsibility?

Government size/tax burden on the x-axis and gross government debt as a % of GDP on the y-axis.

Government size/tax burden on the x-axis and gross government debt as a % of GDP on the y-axis.

Again, the correlation is negligible at 0.05. But what about countries that are in real trouble? If we look at the  the ten countries with the largest debts, they have an average size/tax burden of 33.3, which is very close to the overall average of 34.0. Next we look at the Corruption Perceptions Index,

Government size/tax burden on the x-axis and Corruption Perceptions Index on the y-axis.

Government size/tax burden on the x-axis and Corruption Perceptions Index on the y-axis.

As you can see from the regression line, now we have something, a small correlation of 0.16. But note that the CPI measures lack of corruption so a higher score is better. This means that corruption actually decreases as the size of the government increases. This seems counterintuitive since big government should provide more bureaucracy for corruption to thrive on. But it’s a well-known fact that big government countries like those in north western Europe are among those with the least corruption in the world. Finally crime, or murder to be precise,

Government size/tax burden on the x-axis and murder rates per 100K inhabitants on the y-axis.

Government size/tax burden on the x-axis and murder rates per 100K inhabitants on the y-axis.

Here we a have also have a slight but negative correlation, -0.19. This is more what you’d expect since a small government means less social security and less social control, and that should translate to more crime.

So what’s the verdict? With such small correlations it’s hard to say that the data gives much support for big or small government. It may seem to lean towards bigger is better but those correlations are just too low to make much of. The conclusion is rather that government size is a matter of preference. If you value personal freedom and feel that everyone should take more responsibility for themselves, then a small government is the way to go. If you value a society that takes care of all its citizens even if it stands in the way of your personal freedom, then a big government is the answer.

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8 Responses to Don’t Judge a Nation by the Size of Its Government

  1. Great piece! I totally share the same view. I have to say, though, that ‘big government vs. little government’ is a recurring question pretty much ONLY in the American political debate. In EU also the Right tend to be rather social as opposed to the American Neo-Con Tea-Partier Right.

  2. Staffan says:

    That’s probably true. I haven’t followed the discussions on this that much in the rest of EU but the major party to the right gave up on this after losing big in the elections back in 2002. After that they even started calling themselves the new worker’s party.

  3. Benjamin David Steele says:

    More interesting is what kind of big or small government.

    Some of the smallest governments in the world are the least democratic and the most oppressive. Some of the largest governments such as in Northern Europe have the most well functioning social democracies. Then there are even bigger governments like the US where most of the tax money is spent on defense, veterans affairs, homeland security, alphabet soup agencies, military bases around the globe, military aid to other countries, police, judicial system, prisons, etc; not to mention the massive black budget.

    Bigness really says nothing at all by itself. To put it in different terms, a big strong person could be a criminal who beats you up and robs you or a fireman who carries you to safety, could be a soldier who shoots you or a freedom fighter who fends off your attacker..

    • Staffan says:

      True, that’s my point. This big government argument is just dumbing down the debate.

      • Benjamin David Steele says:

        I do think there would be interesting discussions and analyses to be had within that larger debate. As there are many type of political systems and cultures, I suspect that some will work better with big governments and others with small governments. For example, without a very strong culture of trust, bigger anything becomes problematic and society must rely on more local ways of creating and maintaining a minimal level of societal trust such as churches, kinship groups, etc.

  4. Staffan says:

    Agreed. And like hbd chick points out, this lack of trust is probably related to a history of inbreeding. That’s why the Arab Spring is going to fail. It just assumes that everyone can start trusting each other even though they’re wired not to.

  5. Jay Edgar says:

    What really complicates matters and makes comparing living standards to size of government is the United States provides security for many of these countries at the expense of the U.S. taxpayer. Many of these countries pay very little in securing their waterways, instead the U.S. taxpayer subsidizes them. Many of the socialist leaning countries can afford to be socialist leaning because of this subsidy.

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