Scott Sumner  

Why America can't have small government (and China can)

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David Henderson and Tyler Cowen have linked to an interesting interview with Jean Tirole, the newest Nobel laureate in economics:

"We haven't succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on," he said in telephone interview from the French city of Toulouse, where he teaches. . . .

Tirole remarked that northern European countries, as well as Canada and Australia, had proven you could keep a welfare social model with smaller government. In contrast, he said France's "big state" threatened its social policies because there will not be "enough money to pay for it in the long run"

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According to Wikipedia, in the US government spending is roughly 41.6% of GDP, vs. 35.3% in Australia. That gap is nearly twice the US military budget. So why can't we be like Australia?

At first glance the idea seems appealing. The GOP likes small government, and social democrats such as Tirole and Obama probably think Australia's policy regime is much more humane than America's. But I doubt either party would actually favor the change. For instance, the Democrats would probably have to accept significant cuts in areas like public education and health care for the poor (Medicaid.) The US spends 5.5% on public education, just above Austria, while Australia spends only 4.5%, just below Zimbabwe.

Surprisingly, the GOP might be even more strongly opposed to shrinking the government than the Dems. Here are some areas where I'd guess the US spends lots more than Australia, even as a share of GDP:

1. Military
2. Health care for the elderly
3. Homeland defense
4. Space program
5. War on drugs

Recall that the GOP ramped up spending on most of these programs the last time they were in power (the early 2000s.) So while the small government in Australia might look appealing to America libertarians, the GOP would be horrified by a move in that direction.

PS. Back in 2012 the IMF said total Australian government spending was 36.40% of GDP in 2012, vs. 40.65% in the US. There are some knotty conceptual issues in deciding what actually constitutes government spending.

PPS. Last month I checked the IMF and the data showed that Australia spent 36.805% of GDP in 2012 vs. 38.718% in the US. So now the gap has closed from 6 points to 4 points to 2 points. And this is not a gap that is closing over time, but rather with a re-evaluation of the situation back in 2012. Today I checked again, and the gap is now down to one point in 2012 (36.793% for Australia and 37.780% for the US.) In a few more weeks the US will have had a smaller government than Australia back in 2012. It already does in 2013 (according to the IMF), which suggests there is a more than 6-point discrepancy between the Wikipedia and the IMF estimates for 2013---that's like "losing" two military budgets. So maybe we can be Australia. Maybe we already are.

Here are the IMF estimates of government spending as a share of GDP in 6 of the richest (non-oil exporting) countries in the world. The US (last row on the list) and Australia (first) are currently highest in government spending. Can you guess the other 4?

Screen Shot 2014-11-24 at 8.06.32 PM.png
The three low numbers are Hong Kong, Singapore and Taiwan, and the 32% figure is Switzerland. It's interesting that there are four ethnic Chinese economies in the world. Three are extremely rich and extraordinarily low in government spending. The fourth is in transition to capitalism. I suspect that there is something in Chinese culture that is resistant to extremely high tax rates. This makes me think that in the long run Mainland China may end up looking like the other three---a big economy with small government. The US probably cannot have small government, but "communist" China can.


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CATEGORIES: Political Economy




COMMENTS (16 to date)
Ed Hanson writes:

Scott,

I would appreciate if you would take the time to check your resources for education spending in the US. I only know Colorado where if you add the total spent in the state from local, state and Federal transfer, it is over 70% of all spending. If other states are similar, education spending must be significantly higher.

Ed

Simon writes:

Why would Democrats be dissapointed with Australia's single payer healthcare system? If you have no health insurance the government foots the bill, whether you are rich or poor. I'm confused?

MG writes:

Scott,

This may be apropos to what Ed Hanson observes: are these figures for Overall Government Spending (Federal plus all forms of local governments)?

John Thacker writes:

I believe Australia spends less than the US on agricultural support as a percentage of GDP (not as low as New Zealand, but it is one of the countries that spends the least on them.) That is something that the US could do.

Unfortunately, our farm bills tend to follow a pattern:
1) When prices are low, and support in the form of crop insurance is high, adopt a new farm bill purporting to save money by shifting away from crop insurance and towards guaranteed payments (payments for conservation fall in the guaranteed payments category);
2) Prices change cyclically, and soon prices are high and the new farm bill costs as much or more than the old. Adopt a new farm bill purporting to save money by shifting away from guaranteed payments to crop insurance.

brad writes:

Very interesting that you bring this up as I was looking and thinking about these numbers about a week ago.

The comparison is even more interesting when you look at actual $/Capita instead of $/GDP.

Scott Sumner writes:

Ed, I relied on Wikipedia, let me know if you can find more accurate data. Are you saying 70% of state and local spending? And what is total state and local spending as a share of GDP? ( I thought around 15%)

MG, The data is for all government spending, at all levels. But I suspect there might be errors, it's hard to find accurate data.

Scott Sumner writes:

Simon, That was not my claim, my claim was that they'd oppose spending such a small share of GDP on health care. For instance, it would require massive cuts in Medicaid and Medicare.

John, Unfortunately, both parties support farm welfare.

Brad, That's right.

Mr. Econotarian writes:

I suggest looking at usgovernmentspending.com which breaks down government spending in the US by federal, state, local, and the transfers between them.

Brett writes:
The three low numbers are Hong Kong, Singapore and Taiwan, and the 32% figure is Switzerland. It's interesting that there are four ethnic Chinese economies in the world.

Hong Kong and Singapore are city-states. Compare to them to New York City and London, and they probably don't seem that exceptional. Plus (as I mentioned at your blog) Singapore "cheats" on the public spending measures by using forced-savings to get the same thing as taxation on certain kinds of welfare spending.

Taiwan does fit your point. It's a full-sized country beyond a single city, with exceptionally low welfare spending and no Singaporean-style work-arounds.

sam writes:

The behavior and income of the middle classes of all these countries are the same. Middle-class people travel between them and assume that since the people they meet are similar, the differences in spending must therefore come from policy.

This is myopic.

The poor of Taiwan, Hong Kong, and Singapore all have high workforce participation and low levels of criminality.

This is obviously not true in the United States.

Nathan W writes:

Once you account for other security organs, probably the entire 6.3% of GDP difference is more or less accounted for.

We would do well to strive for a world in which it is sensible to not spend so much on security.

But in the meantime, there are some folks who prove their insanity daily by WANTING war and promoting the pursuit of first-strike war on other people's homelands and cultures, even going to far as to be provocative both at home and in what they call for abroad. And so it is difficult to enjoy a peace dividend that could come from the pursuit of mutually respectful relations between states, cultures, societies, or whatever sorts of groupings are most relevant to different people.

Very interesting comments about government size and taxation in China. I hadn't thought of it that way before, and indeed the size of the government in the economy is not as large (relative to other countries) as most people would guess. However, I would certainly not underestimate the ability of the Chinese authorities to mobilize vast resources to accomplish specific objectives once they set their mind to it, even if it requires specific public investments accounting for entire percentages of GDP (e.g. Three Gorges building and relocation, build an airport and rapid transit in every city over one million population, etc.).

Lorenzo from Oz writes:

We have one of the largest private school sectors in the developed world (a result of large Catholic minority pushing back against "Protestant" state education).

Also, we means-test welfare/transfers.

As for subsidising agriculture--it's a major export, so hard to subsidise. Indeed, for much of our C20th history, agriculture was subsidising manufacturing.

michael pettengill writes:

Do you count the corporations building the HSR, the cargo rail, the toll highways, the ports in China as not government spending?

Those corporations must meet spending objectives laid out in the 5 year plans and then modified to keep creating jobs for the constant flow of workers from the farms. While the US railroads were private in the US, they were clearly dependent on government just as China's corporations are - if the government is giving you 640 acres plus a million in debt plus a bonus for every miles of track laid, is that not millions of government spending per mile. Is it not government spending to take land from landowners using the US Army equivalent to spending cash?

And what of the corporation that bought Smithfield as required by the 5 year plan to increase the amount of pork in the daily diet to prevent violence in the streets - that is the equivalent to cash spent on riot police.

A current deal is a Chinese corporation trying to buy some wind farms in the US, which is likely part of the 5 year plan because that gains China's access to the operational experience of managing the power supply and demand.

China puts its government R&D spending into it foreign policy by picking partners in nuclear, trains, etc and requiring technology transfer to China's corporations AND Chinese employees. The HSR are running faster than the French designs they began at - China is building enough train sets that they can incorporate new innovations and refinements several times faster than the French or GE.

While the US has used all sorts of incentives, mostly tax dodges to do much of what China does to implement its government policy. And the early US patent law was really intended to get people to publish British trade secrets and to engage in industrial espionage so the US could have its own industry independent of the British.

Ed Hanson writes:

Scott,

I attempted to follow up on data about Colorado education spending. To be honest, I could practically produce any number I wanted due to the variety of sources, definitions, and "slant" out there.

But I will do my best.

From fiscal (school) year 2010-2011, and from the source of Colorado Department of Education,

http://www.cde.state.co.us/cdefinance/FY10-11RevExp.htm

which produces reports showing all revenues to all the different school districts, and other like education providing districts, seem to provide the most solid numbers I could find.

State sources - $7,283,198,741
Local sources - $4,263,465,401
Total sources - $11,546,664,142

Notes about the above total:
1) Only k-12 eduction, does not include higher education.
2) I believe these totals are only operating budget, thus, not including capital cost.
3) State totals do not include other expenses connected to education, such as additional state money given to the state employee defined benefit plan which the majority of participants are connected to the eduction category. Likewise, no provision is in the total for the unfunded liability of this state pension fund.
4)Federal eduction transfers connected to operating budget are assumed included

The most difficult number to lock down is the relevant amount of revenues to include from the overall revenue sources of the state, as reported in the State Taxpayer Accountability Report (STAR) found thrugh the Treasurer's site at:

http://www.colorado.gov/cs/Satellite/Treasury_v2/CBON/1251590030748

The state reports three general categories of revenues, state general taxes, state dedicated taxes, and other revenues (which include Federal transfers, and other items like court finds and fees, college tuition and fees, unclaimed property, and on and on). The total of of revenues resources are the following:

General taxes - $7.13 BILLION
Dedicated taxes - $1.38 BILLION
Other - $16.25 BILLION
Total - $24.76 BILLION

As a judgement call I choose to include all tax revenues and from the other category just the federal transfers assumed to be 62% of the category.

16.25 * .62 = 10.075 BILLION

which results in an effective total of 18.585 BILLION

Conclusion:

Fraction of Colorado resources for K-12 education = 11,546,664,142 / 18,585,000,000 = .62 or 62%

Other estimates:
Commonly repeated number for Colorado spending on eduction is 42.2% of budget which is close to the number if the 24.76 BILLION number had been used in the denominator.

But the question remains, how should capital cost be included, what higher education numbers should be included, what off budget numbers such as unfunded pension benefits should be included, and, of course, what total revenues should be include. It just may be true when these other numbers are added in the education cost, that Colorado may approach the 70% number of my original post.

Final assumptions:
Colorado is typical.
Federal/State tax burdens are 50/50
All Federal eduction spending for K-12 are included in the above numbers.

62% * 0.50 = 31% of all spending nationwide on eduction. To be honest, it is a number that is higher than I ever thought of, so would like to see a better and more complete analysis than mine.

Ed

Ed Hanson writes:

Scott,

if you have a continued interest in Colorado eduction spending, I have a suggestion. Colorado has improve its transparency for education spending. But, of course, transparency is a relative word. So, besides the usual information resources such as the Colorado Department of Education and the State Treasurer, I would suggest contacting a small libertarian Colorado think tank, The Independence Institute, http://www.i2i.org/.

It has done extensive work breaking out all the state numbers on education, and, I believe, would respond with great cooperation to a well known economist such as your self.

Ed

Floccina writes:

It would nice if we had a smart party that told the big Government parties that we will compromise but only where there is justification. So for example it would OK with a carbon tax because there exists a rational argument for it but the ethanol program has got to go.

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