Every so often I like to draw up the chart above. It shows the latest (2005) OECD figures on GDP per capita plotted against the size of government for each of the G7 major economies.
The negative relationship jumps off the page.
GDP per head is highest in the US, at $41,900 pa, and lowest in Italy, at $28,500 pa. But on government spending as a percentage of GDP, the situations are somewhat reversed: the US (even after the Bush splurge) is on 36.4%, while Italy is on an eye-popping 48.2%.
If we draw a simple line between the two, it says that for every one percentage point increase in the share of government in GDP, GDP per capita is lower by 2.9%. On average, for every one percentage point extra of governmnet spending they get, Italians are worse off by 2.9%.
That's one helluva price to pay for... er, whatever it is Big Government provides.
The negative relationship jumps off the page.
GDP per head is highest in the US, at $41,900 pa, and lowest in Italy, at $28,500 pa. But on government spending as a percentage of GDP, the situations are somewhat reversed: the US (even after the Bush splurge) is on 36.4%, while Italy is on an eye-popping 48.2%.
If we draw a simple line between the two, it says that for every one percentage point increase in the share of government in GDP, GDP per capita is lower by 2.9%. On average, for every one percentage point extra of governmnet spending they get, Italians are worse off by 2.9%.
That's one helluva price to pay for... er, whatever it is Big Government provides.
The UK does only marginally better. We get 9.1 percentage points more of government spending than the US, but our per capita GDP is 23.4% lower. That's a trade-off rate of 2.6 to 1, compared to say, France's 1.6 to one.
What's that?
Laughably simplistic? Correlation does not imply causation?
Hmmm.
As regular readers will know, the OECD itself has done stacks of work on this. And they've got people who have taken econometrics far beyond anything Tyler has forgotten from his LSE Masters. Their conclusion is:
"Taxes...seem to affect growth both directly and indirectly through investment. An increase of about one percentage point in the tax pressure... could be associated with a direct reduction of about 0.3 per cent in output per capita. If the investment effect is taken into account, the overall reduction would be about 0.6-0.7 per cent." (The Sources of Economic Growth in OECD Countries, Section 2.3)
Yes, they look at tax rather than spend, but Ricardian equivalence says they're pretty much the same because taxpayers will have to pay eventually. And unlike the OECD, I don't have to time to disentangle the "tax pressure" effects of all those fiscal deficits.
Still, I'm happy to bow to the OECD. Let's agree the impact of every additional percent of GDP taken by government is to reduce per capita GDP by 0.7%.
Bear that figure in mind next time you vote for one or other of our indistinguishable high spending politicos.
PS Why is Japan such a poorly performing outlier? My guess is that they are still recovering from their huge credit based financial bubble in the 1980s. Thank God we could never get ourselves into a situation like that.
PPS Just for the record, per capita GDP is shown in 2005 US$ based on the OECD's current Purchasing Power Parities
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