The claim that the size of government is inversely related to growth is misguided and detrimental.
A major purpose of the Rediscovering Government initiative is to counter unfounded and damaging claims about the effects of government on an economy’s growth. The Financial Times published a letter on June 27th, which asserted that all economists agree the size of government is inversely related to growth and that high levels of debt tamper growth. I wrote a brief letter challenging such all-too-common mythology, which was published on June 28th.
See the letter below, followed by links to first-rate scholars’ work that can be found on our web site. This in turn is followed by a link to a well-documented rebuttal to the widespread claim that debt of 90 percent affects growth negatively. Is there really a demarcation point beyond which debt as a percent of GDP slows growth? Many observers have simplistically adopted the Reinhardt-Rogoff analysis that debt of 90 percent of GDP is a threshold, but it is not considered valid by many economists because the analysis is so dependent on a few atypical post World War II years in the U.S. This criticism of Reinhardt-Rogoff can be found below. Finally, the UNCTAD economist, Ugo Panizza, wrote us and sent his own fine work on the subject. We link to that here as well.
On issues involving the uses and purposes of government, we at Rediscovering Government will respond to mythologies and deliberately misleading arguments as quickly and responsibly as possible. Our aim is to correct and nourish the public discourse.
FINANCIAL TIMES, June 29, 2012
From Mr Jeff Madrick.
Sir, Andrew Sussman (Letters, June 28) makes two bold assertions that require correction.
He says there is an inverse relationship between the size of government and growth. This is untrue. Serious economists agree there is no such statistical relationship. Many big government states have grown faster than the US.
Even more boldly, he states that “one thing all economists agree on” is that if debt reaches 90 per cent of gross domestic product, growth will slow markedly. This is based on a paper by Carmen Reinhardt and Kenneth Rogoff that has been widely criticised. Few economists agree with this simple conclusion.
Jeff Madrick, The Roosevelt Institute, New York, NY, US