No link between size of state and growth


2:11 pm - June 14th 2012

by Richard Murphy    


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It’s often said that the state has to be shrunk to allow growth to happen.

Martin Wolf of the FT produced this graph, and I’ve borrowed it from the the Fahrenheit 23 blog:

Where’s the correlation?

There isn’t one.

Which shoots 98% of the neoliberal argument into oblivion.

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Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments


1. Chaise Guevara

Where’s the graph?

There isn’t one.

(At least on my computer.)

Neither does it show that a larger state creates growth. Nevertheless, you can derive a lot of conclusions from this by extrapolation such as zero state spending does not inhibit growth, a state taking 150% GDP will still have growth and many others. Not really very useful.

” No link between size of state and growth ”

Is not actually the argument that Martin Wolf made and used the above graph to illustrate his point. His argument was that there was no relation ” between the share of government revenue and the rate of growth of real output per head (that is, productivity) over the 1989-2011 period. ” In the illustrated countries the regression line is flat. His blog was about the level of taxation rather than the size of the state per se, which most people take state to mean state employees. The size of the state obviously does matter for productivity if lots of people are employed unproductively. Employing lots of people to pointlessly count lampposts would clearly not do as much for productivity as employing lots of people in a good public education service. So, it depends how wise the government are in their spending decisions.

This can’t be right. Everybody ‘knows’ that the tax burden in the UK was outrageously high even before the financial crisis, probably around 90% or something, what with all those stealth taxes and whatnot. Go away and produce a graph that doesn’t suggest our tax burden is actually rather modest in comparison with the majority of similar countries, including four of the six that have seen higher growth than the UK over the period shown.

Why, if we believed this nonsense. we might almost think Gordon Brown’s pre-crisis spending levels were always relatively modest at around 40% of GDP, and the pre-crisis deficit wasn’t a result of outrageous spending so much as keeping the tax burden unnecessarily low at around 38%.

@ Richard Murphy

Well done for conflating “size of the state” with “government revenues” for a start. They are simply not the same thing.

Then what you are clearly and often tryig to argue is that large states somehow increase growth – which the chart above fails to show – whilst ignoring the fact that the highest revenue generating governments in the chart above are also amongst the ones with the most free markets. For example, the Scandi’s have part privatised healthcare, and ambulance and fire services have heavy private sector involvement. Which I knoow is something you are steadfastly against.

I sometimes think you would be happiest if you could confiscate all money and spend it as you see fit.

How about we disaggregate that blurry average a little bit: http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

7. Luis Enrique

yes the difference between size of state and tax revenues is … transfers. A country could be raising a lot in taxes which it just distributes to pensions and welfare claimants for example, whilst having a small government.

however, I’m not sure there’d be much more of a relationship between government expenditures and growth – Scandinavians have larger governments on the spending side too don’t they?

nonetheless certain people say that high taxes discourage investment, labour supply and thus retard growth, and data like this are hard to reconcile with that. Other people might say that different kinds of taxes have different affects on growth and places like Scandinavia use less distortionary taxes. People might also distinguish between different kinds of public expenditure. Some of these people might even be mainstream “neoliberal” economists – 98% of what they do just having been refuted by this correlation, apparently.

I posted this as part of a discussion on another thread but, as it’s still on the clipboard, it might provide a useful clue as to what promotes growth……….

http://www.quebecoislibre.org/06/061029-5.htm

Ireland’s a special case (catch up).

What’s really amusing about the chart is that it shows us that if you want to have both a large state portion of GDP (either government itself or redistribution) and also economic growth then you need to have a regressive, not progressive, tax system.

For example, the Nordics do have large states and also growth. They also have eyewatering VAT rates. And lower corporation tax rates than the UK or US or Japan for example.

Which is a neoliberal argument as it’s one I’ve been making for years and as we all know, I am indeed a neoliberal baby eating bastard.

10. Third rate Les

JC has summed it up pithily in post two. Destined to be roundly ignored of course,in favour of partisan arguments.

A neat graph exploding the damaging small-state myth.

trying to rack my mind for any benefits that have accrued in the 40 years since this small state snake oil was first sold to a credulous public. Nothing obvious emerges.

Now we can pack up yet another haory rightwing myth, its time to get the State to roll up its sleeves and stimulate the economy with a healthy dose of public spending.

Austerity has failed. The supporters of austerity are now perceived like the utter clowns they are.

Time to finally ignore them and lets move the economic paradigm onwards and away from the small state fairytale.

9. Tim Worstall

As you admit the high taxing and high spending nordics are obviously more successful economically and socially than the “small state” anglo saxon countries.

Yes, we should spend as much as they do, and we can make sure the mix of receipts reflects our priorities – hiking corporation tax, increasing the top rate of tax back to 50% and lowering the VAT rate.

We can also eschew any move towards school vouchers and other barking mad rightwing ideas that may have been taken up in these countries.

Because we have that choice.

So I agree with you, let’s do it.

“Yes, we should spend as much as they do, and we can make sure the mix of receipts reflects our priorities – hiking corporation tax, increasing the top rate of tax back to 50% and lowering the VAT rate. ”

Sadly you’re missing the point I’m making.

Progressive tax system, economic growth, large state.

You can have two and only two of those three. Make your choice.

The Nordics have decided on regressive tax system, economic growth and large state.

I would prefer a progressive tax system, small state and economic growth.

If you want both a large state and a progressive tax system then I’m afraid you’re going to have to pick the no growth option.

Tim Wostall

Progressive tax system, economic growth, large state.

You can have two and only two of those three. Make your choice.

Um, no. I won’t take your choice.

There are some cast iron natural laws. If I allow a ball to drop from my hand it will drop and hit the ground. That is the law of gravity. Testable. Falsifiable.

There are not such laws in economics.

From 1945 to 1979 the UK had a beneficial mix of progressive taxation, economic growth and an increasing state (what is “large”? Totally subjective so not testable).

Prosperity was better achieved under those conditions than in any of the years we’ve experimented with the dodgy economics you buy into.

“From 1945 to 1979 the UK had a beneficial mix of progressive taxation, economic growth and an increasing state (what is “large”? Totally subjective so not testable).

Prosperity was better achieved under those conditions than in any of the years we’ve experimented with the dodgy economics you buy into.”

An amusing contention.

GDP per caita is near twice now what it was in 1979. So clearly we have become more prosperous under the newer system.

“There are some cast iron natural laws. If I allow a ball to drop from my hand it will drop and hit the ground. That is the law of gravity. Testable. Falsifiable.

There are not such laws in economics. ”

I’m afraid there are you know. There is no unicorns poop rainbows option available.

Subsidise something you get more of it, tax it you get less of it. Rent control reduces the amount of housing available for rent. Taxation of corporate profits reduces growth per £ raised in revenues more than taxation of consumption or property does. There really are some iron rules out there.

Tim Worstall

Where are your subsidies going to come from if you don’t tax?

Clueless.

Talking of unicorn poop, your corp tax assertion has a similar stink.

We had higher and more sustainable economic growth, plus higher wages as share of GDP with higher corp tax.

Step out of the classroom sometime. You’ll see your theories don’t hold up in the real world.

“We had higher and more sustainable economic growth, plus higher wages as share of GDP with higher corp tax.”

Here is where we come to those truths and iron laws of economics again.

You’ve been taken in by that graph of the labour share of income (Howard Reed was the first offender to post it). The profit share of GDP is almost exactly the same as it was in 1980.

The labour share of income is lower. That’s because the other two parts of GDP have risen: “mixed income” (ie, self employment income) and taxes and subsidies (largely, VAT). Please note, there are, in the income method of measuring GDP, four elements, not just two.

Oh, and we didn’t have higher corporation tax back then. We had lower.

http://www.oecd.org/dataoecd/48/27/41498733.pdf

2.2 % of GDP in 1975, 4 % in 2006. The big rise coming from Lawson’s reforms where he lowered the rate and removed many allowances.

Tim Worstall

So, Corp Tax paid is a higher share of GDP at the same time profits are a higher share of GDP (because wages have been kept low).

We could conclude that had the previous higher rates been kept, the share paid by Corp tax would probably be higher still. Wages have been kept low while profits soar so its no surprise the share has risen.

Like Ireland, the daft race to lower corp tax just ended up in one big credit crunch smash. No benefit there at all.

“So, Corp Tax paid is a higher share of GDP at the same time profits are a higher share of GDP (because wages have been kept low).”

No, profits are the same as a share of GDP as they were in 1980. I did actually say that above, didn’t I?

20. Richard W

18. BenM

” Wages have been kept low while profits soar so its no surprise the share has risen. ”

You better tell the ONS that profits have soared, Ben. They have UK corporate profitability in decline for almost 15 years. The profit share of GDP in the UK is one of the lowest in the EU, wage share is one of the highest.

http://www.ons.gov.uk/ons/rel/pnfc2/profitability-of-uk-companies/q3-2011/sum-corporate-profitability-2011q3.html


Reactions: Twitter, blogs
  1. Liberal Conspiracy

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  2. Ellis Palmer

    RT “@libcon: No link between size of state and growth http://t.co/DzRRr23x

  3. Sarah

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  4. Jason Brickley

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  5. HHLimbo

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  6. leftlinks

    Liberal Conspiracy – No link between size of state and growth http://t.co/Pjfu6F9O

  7. Martin McGrath

    There is no link between size of state & economic growth http://t.co/sjNLxp6n Again: There is no link betwen size of state & economic growth

  8. Robert CP

    No link between size of state and growth | Liberal Conspiracy http://t.co/emBN1Qpc via @libcon

  9. Spir.Sotiropoulou

    No link between size of state and growth | Liberal Conspiracy http://t.co/A5FHwKO9 via @libcon

  10. BevR

    No link between size of state and growth | Liberal Conspiracy http://t.co/iT1vDZs9 via @libcon

  11. Mike O'Brien

    RT @libcon: No link between size of state and growth http://t.co/GYtu4jd9

  12. Alex Braithwaite

    No link between size of state and growth | Liberal Conspiracy http://t.co/8qgkMeOz via @libcon

  13. Natacha Kennedy

    No link between size of state and growth. Conclusive proof neoliberal economics are wrong. http://t.co/0lHFWAtW via @libcon #Osborne





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