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BPEA Article

What Do Cross-Country Studies Teach about Government Involvement, Prosperity, and Economic Growth?


OVER THE LAST three decades, in all industrialized countries, there has been an enormous expansion of government involvement in the economy, as measured by the share of national income going to taxes or government expenditures. Figure 1 shows that, averaged over the OECD countries, the ratio of either tax collections or government expenditures to GDP rose sharply between 1970 and 1990. Arguably it is this expansion of government that uniquely characterizes the post- World War II era. From the beginning, the growth in government has attracted critics who view this as an ominous development, endangering the political rights of the citizenry and economic prosperity. Leaving aside the issues of political freedom, this paper critically evaluates the evidence about the influence of government tax and expenditures on economic prosperity and growth.


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