As ecomists and policymakers strive to understand the causes of the global financial crisis, pinpointing the relationship between government size and ecomic growth is crucial. In this incisive ecomic study, Andreas Bergh and Magnus Henrekson find that in wealthy countries, where government size is measured as total taxes or total expenditure relative to GDP, there is a strong negative correlation between government size and ecomic growth-where government size increases by 10 percentage points, annual growth rates decrease by 0.5 to 1 percent. Bergh and Henrekson stress that statistical correlations, even when highly significant, are t law. Some countries with high taxes enjoy above-average growth, and some countries with small governments have stagnant ecomies. The Scandinavian welfare states, for example, have enjoyed steady growth over the last decade despite their large governments. However, these nations compensate for high taxes by employing market-friendly policies in other areas, such as trade openness and inflation control. Government Size and Ecomic Growth concludes that, in every case, ecomic freedom is a crucial determinant of ecomic growth_suggesting that government intervention in the marketplace may be the wrong approach to solving the ecomic crisis.
Andreas Bergh is a researcher and teacher in teh School of Economics and Management at Lund University and a research fellow at the Ratio Institute. Magnus Henrekson is Jacob Wallenberg Professor Economics at Stockholm School of Economics and director of the Research Institute of Industrial Economics.