NCPA - National Center for Policy Analysis

Joint Economic Committee Report: Government Retards Growth

April 1, 1998

As government expenditures rise, economic growth rates fall. That is the message of a study prepared by economists James Gwartney, Robert Lawson and Randall Holcombe for Congress's Joint Economic Committee.

The trio examined data from 23 member-countries of the Organization for Economic Cooperation and Development, as well as from the U.S.

  • Even though the U.S. economy is now moving into the eighth year of an expansion, the growth of real gross domestic product (GDP) during the 1990s is only about half of what it was during the 1960s and well below the 1970s -- while government's role has expanded.
  • On average, government expenditures among the OECD countries rose from 27 percent of GDP in the 1960s to 48 percent in 1996 -- accompanied by a decline in the average growth rate from 5.5 percent in the 1960s to 1.9 percent in the 1990s.
  • When government spending in these countries was less than 25 percent of GDP, they achieved a real average growth rate of 6.6 percent -- which plunged to just 1.6 percent when government spending exceeded 60 percent of GDP.

Those countries where government grew the least, suffered the least.

  • Between 1960 and 1996, the size of government as a share of GDP increased by less than 15 percentage points in the U.S., Britain, Iceland, Ireland and New Zealand -- and their average growth rate over this time dropped 1.6 percentage points.
  • Denmark, Finland, Greece, Portugal, Spain and Sweden allowed their government sector to increase by 25 percentage points or more over the same period -- accompanied by a fall in their average growth rate of 5.2 percent.

In Hong Kong, Singapore, South Korea, Taiwan and Thailand the size of government remained virtually constant between 1975 and 1995 -- at about 20 percent of GDP. These countries enjoyed the most rapid real economic growth rates of all during 1980-'95.

Source: James Gwartney, at al., (Florida State University), "The Size and Functions of Government and Economic Growth," April 1998, Joint Economic Committee of Congress, Washington, D.C.


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