Does government size matter?

In today's National Post, William Watson says 'Voters deserve to know where parties stand on size of public sector'. I suppose that's true, but I really don't see why it matters much.

Here's a graph of various rich countries' GDP per capita and social spending:

I don't see any obvious tradeoff there.

Nor has the empirical growth literature been able to identify any sort of relationship between economic growth rates and the size of the public sector. Bonobo Land summarises  Xavier Sala i Martin's survey paper 15 years of new growth economics: What have we learnt? as follows:

i) There is no simple determinant of growth.
(ii) The initial level of income is the most important and robust variable (so conditional convergence is the most robust empirical fact in the data).
(iii) The size of the government does not appear to matter much. What is important is the 'quality of government'.
(iv) The relation between most measures of human capital and growth is weak. Some measures of health, however, (such as life expectancy) are robustly correlated with growth.
(v) Institutions (such as free markets, property rights and the rule of law) are important for growth.
(vi) More open economies tend to grow faster.

There may be ideological grounds for preferring a large or small public sector, but it doesn't seem to be much of a factor for economic growth.

Comments

[jimmmy]

"I don't see any obvious tradeoff there."

well, add up the the gdp growth of the left nine, and the right nine (leaving norway in neither) and maybe things will become more "obvious" to you.

it turns out that the 9 countries with less "social spending" grew by 2.63% in 2003 and the 9 with more "social spending grew by 1.42%. that's a difference of 1.21% or 85%.

?

[Stephen Gordon]

I wouldn't claim that the graph proves anything, one way or the other. The real evidence is in the empirical growth literature, and no-one seems to have found any significant relationship there.