NCPA - National Center for Policy Analysis


July 13, 2010

Americans are debating whether to substantially expand the size of their government.  They should look carefully before they leap, according to Andreas Bergh, an associate with the Research Institute of Industrial Economics, Lund University and the Ratio Institute in Stockholm; and Magnus Henrekson, CEO of the Research Institute of Industrial Economics in Stockholm. 

Fifty years ago, Sweden and America spent about the same on their government, a bit under 30 percent of gross domestic product (GDP).  This is no longer true, say Bergh and Henrekson: 

  • In the years leading up to Sweden's financial crisis in the early 1990s, government spending went as high as 60 percent of GDP; in America it barely budged, increasing only to about 33 percent.
  • While America was maintaining its standing as one of the world's wealthiest nations, Sweden's standing fell; in 1970, Sweden was the fourth richest country in the world on a per capita basis and by 1993, it had fallen to 17th.  

According to Bergh and Henrekson, Sweden's dramatic increase in the size of government contributed to its sluggish growth.  The weight of the evidence demonstrates that when government spending increases by 10 percentage points of GDP, the annual growth rate drops by 0.5 to 1 percentage point.  This may not sound like much, but over 30 years this would result in the loss of trillions of dollars each year in an economy as large as America's. 

To put it in personal terms: 

  • The average American's per capita income in 2009 was $46,405.
  • A dip of 1 percent in the economic growth rate (to 2 percent from 3 percent for example) would mean an individual income loss of $464 in the first year.
  • Over 30 years, a 1 percentage point difference in the growth rate translates to roughly $354,000 in lost income per person. 

Many Americans argue that the United States could safely increase its spending share from roughly 32 percent of GDP to between 37 percent and 38 percent of GDP.  The evidence suggests otherwise.  The United States needs to acknowledge the trade-off between government size and economic growth.  A larger government sector may decrease some economic inequality, but will ultimately leave Americans sharing smaller pieces of a smaller pie, say Bergh and Henrekson. 

Source: Andreas Bergh and Magnus Henrekson, "Lessons from the Swedish Welfare State," Wall Street Journal, July 10, 2010. 

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