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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Comparing this graph to that in Krugman blog March 27, 2011 ‘The Euro Straitjacket’ rather completes the picture.
Here http://krugman.blogs.nytimes.com/2011/03/27/the-euro-straitjacket/
Absolutely. What is important is the amount of spending, it doesn’t matter whether that is public spending or private spending. Indeed, ‘public spending’ turns into private spending – as salaries paid to individuals who then buy goods and services – and private spending turns into public spending as part of that income is paid back as tax revenue. You have to analyze the entire system, not just one part of it. What it is spent on is important of course – spending on buying shares, for example, is unproductive growth because you’re typically just rewarding someone else who got there first, not providing any value to the business. (Maybe the previous owner will spend their profit on buying new share issues or on buying goods or services, but if they in turn just buy someone else’s shares, it’s just gambling.)
Companies could certainly be afraid of government and non-profit organizations deciding to compete in their market, but it means they would have to be a more agile competitor, exactly as if a large business decided to enter their market. Government would, in my world, enter a market if there was serious market failure, or where the waste of resources that is an inevitable consequence of competition (assuming that companies will tend to over-supply a market that has low friction of movement between competitors) is socially unacceptable. For example, in railways, parallel tracks for each competitor – the only true form of competition – are not acceptable, so we accept a government-backed non-profit monopoly of railway track ownership – though the rest of the market is not really a market at all as the ‘competitors’ do not compete directly.
I remain convinced that organizational inefficiency is a problem relating to the size of an organization: government is no more, and no less, inefficient than any other similarly-sized enterprise. However, you’re not paying anyone a profit on top of the fundamental costs. Profit motive? The peons who actually do the work don’t get to share any significant amount of the profit (and I write this as an employee of a small business that does have profit-related bonuses) and actually, there are numerous studies showing that money is actually a bad way to motivate people. You can demotivate people by not paying them enough, relative to peers, but very few respond to additional pay above their peer level.
Errr. On the flip side doesn’t it shoot the requirement for a big socialist state into oblivion?
Far from it – the state does in many cases meet most of people’s needx more effectively thatn the market can
But you have just shown that there is no correlation between state spending and growth, so if that is the case whats the point in the state spending.
Another thing is that if I were to pick a country to live in from that selection it would be from the left hand side. Places like Canada, Australia, US, Switzerland.
This graph seems to suport the argument for a small state as much as it does for a big state. Don’t think it really helps to determine viability of an economy.
What it shows is the rightbwing nonsense on state spending crushing growth is wrong
Why does the state spend? Simple. If you care for universal revision – and compassionate people do – then it it is way out th most efficient provider of service
The resulting equality then creates stron societies – as wilkinson an Pickett show
That’s why
Didn’t really answer the question. The graph and question was in relation to growth and govt. spend. Those two things. We can of course break out into other areas and spend several years debating the differences, but the graph and questions related to growth and govt. spend. Thats all.
I hate to say it but the diagram provided does not support Richard’s statements.
The diagram compares tax revenue to growth. Tax revenue is only one component on the size of the state spending. Take a simple example two countries, each of whom has 3% growth and a public sector spending which is 43% of GDP, one country takes 35% of GDP in taxes (so running an annual deficit of 8%) the other balances its books by taking 43% of GDP in tax revenue.
The two countries would appear in completely different parts of the diagram, yet the size of the state in both cases is the same as is the growth rate.
What the diagram shows is that there is no clear correlation between growth and tax. That seems plausible. If you look at tax revenues as a percentage of GDP over the long term (say 30+ years) in many countries the percentage is suprisingly stable over time even when tax rates in that country vary significantly. It may be the case that for each country there is a “natural” rate of tax (as %age of GDP) that the population is willing to accept and tax take up to that “natural” rate has no impact on what growth rate a country can actually run at