Government and the economy

The recent federal government shutdown has revived debates about the impact of the government’s size on the economy. One side says larger government gets in the way of the economy and slows growth.  But another viewpoint argues government spending is vital to keep the economy growing improving lives and insuring fairness. N.C. State University economist Mike Walden explores what research tells us about the topic.

“This has been the subject of much, much debate and study by economists over several decades. And recently we had a very good study published that actually went back and analyzed all the other studies that have been done over the decades looking at this precise relationship — the size of the government in a country and that nation’s economic growth. And in general … what it did find was that, holding everything else constant, affects how economies grow. The bigger the government sector, the smaller the rate of growth of what we call GDP, gross domestic product.

“But several caveats to that finding: First of all, although the relationship between size of the government and growth of the economy was statistically significant, it was a very, very small relationship. Secondly it found that … the relationship depends on the type of spending.  They found, for example, that if the government is spending more on education and infrastructure, that may actually increase economic growth.On the other hand, if it’s spending more on transfers, that may decrease economic growth.

“And then lastly there was a particular set of countries Scandinavian countries that went against the grain. They have both big government and faster economic growth. Some economists think that’s because … any adverse effects of larger government in those countries is counteracted by those countries having pro-growth regulations as well as pro-growth research.”