Can governments increase growth?

Hopi says politicians should do more to promote economic growth.
Of course, it’s easy enough to boost short-run growth - just throw enough money around. Promoting long-run sustained growth is, however, much trickier. It might even be impossible. This paper concludes:

Except for the decades around WWII, there is no evidence of country specific effects on long run growth rates…Growth rates are determined by international factors, and are insensitive to national policies, especially for small countries. This implies severe restrictions on the ability of most governments to increase national long run growth rates.

To get an idea of what they mean, here are some annualized real GDP growth rates for some significant countries between 1980 and 2007. I present the figures in ranges, such that we can be 95% confident that true growth is within this range. I do this because, even over a period as long as 27 years, it’s possible for two countries with identical true growth to differ if one has good luck and the other bad.
France: 1.7-2.5%.
Italy: 1.3-2.2%
Spain: 2.4-3.6%
Sweden 1.6-3.0%
UK: 2.0-3.2%
US 2.4-3.7%
These ranges suggest we can be pretty confident that Italy has done worse than the US or UK. But we cannot be at all confident that the  US has out-performed Sweden, or vice versa. The opposing poles of mixed capitalism - social democratic Sweden and freer market US - are consistent with similar, maybe indistinguishable, growth rates.
Big differences in institutions and policies, then, seem to generate similar growth rates. Which suggests that - at least within the wide parameters set by actually-existing mixed capitalisms - policies (or at least those that have been tried) might not make much difference to trend growth.
Perhaps, therefore, we shouldn’t look to national governments to promote long-run growth.
Equally, GDP growth should not be the test of the success or failure of policies. 

Comments

[Mark Wadsworth]

Broadly agreed.

But if we accept that there is little that 'governments' can 'do', then maybe they just ought to be 'doing' less, full stop?

What governments CAN do is have low taxes (or at least shift taxes from production to land/monopoly values), minimal regulation, stable and reliable legal system, free trade, liberal planning laws, and just as a fall-back, some sort of Citizen's Basic Income scheme.

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I think that governments can help build growth, by creating the conditions, environment and mindset for the country to operate in.

By creating public sector services that deliver excellent quality, with limited bureaucracy...and setting an example so that every person can contribute towards learning and improvement, which is embedded in the front line.

A place where government removes the problems that stand in people's way and not by continually adding complexities and new rules to peoples lives all of the time.

[pablopatito]

What about Japan and South Korea? Did their government policies really have no influence on post-war growth?

[chris]

@Pablopatito. Yes, they did. Policy and institutions matter enormously for whether poor countries catch up with the rich or not. It's just that once freeish markets and secureish property rights are in place, and a country is near the technological frontier, the ability of policy to increase long-run growth seems to diminish a lot.
@ Howard. Your theory sounds fine. It just runs into the data. Sweden, I guess, has had more excellent public services than the UK. But it's not obviously grown faster.
Obviously, we should think of how to improve public servies and reduce bureaucracy. But the case for doing so does not lie in the impact this'll have on long-run growth.

[Gordon]

Forgive my economic ignorance, but is this analysis not rather simplistic? By looking at the overall picture you are ignoring the possibility that it may simply be a case of various factors cancelling each other out.

So low taxes in the United States may have helped their growth while poor public services held them back; likewise high taxes may have slowed Swedish growth while good public services pushed them forwards (to take the examples used already).

Thus, as far as I can tell, the evidence you presented above (and I must admit that I only read the post, not the links) does not necessarily indicate what you suggest.

[Luis Enrique]

gordon,

do you think that it is some sort of feature of economic reality that policies with a good effect in one direction are always accompanied by bad effects in another (i.e. you can have good growth fostering public services, but you'll also have growth crippling taxes) or do you think that as a matter of chance it happens to be that way in the countries Chris gives data for? The former seems to bolster his argument that, once a country has reached a certain stage of development, on net government policies can do little to affect growth. The latter just seems unlikely.

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By looking at the overall picture you are ignoring the possibility that it may simply be a case of various factors cancelling each other out.

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[pablopatito]

I read a paper years ago that studied the economic performance of Swedes living in USA. It concluded that Swedes are simply more productive than other nationalities and if Sweden implemented the US economic and political system then it would be the biggest economy in the world.

If you believe, as I do, that there are big cultural differences in the populations of different countries, then you can't get any firm conclusions from comparing government policies in those countries. You're not comparing like for like.

[William]

There is one problem with these figures - they ignore the fact that variation in growth rates could be correlated. Take for example two countries A & B. The growth rates for various years are:
A 1 2 3 2 1 2 3
B 2 3 4 3 2 3 4

In every year, B grows faster than A, but the range of growth rates is A [1...3] and B [2..4] They overlap, so according to Chris there is no difference. But it's clear that B is faster growing than A.

[Mark Wadsworth]

@ Luis:

"i.e. you can have good growth fostering public services, but you'll also have growth crippling taxes"

I prefer to see 'the state' as an economic actor in its own right; as a form of mutually owned service provider. There is clearly a range of things that only the state (even if this only at 'local parish council' level) can do (law and order, public health, legal system, defence, immigration control, street sweeping etc) which ADD value, we are collectively enormously better off for this. It can charge for the VALUE of these 'services' (which far exceeds the COST) via land value tax (as opposed to taxes on incomes or production, which destroy wealth).

Above and beyond that, the state shouldn't dabble in things like education and health (let alone ID cards, anti-smoking programmes, fox hunting bans, industry-specific subsidies, running banks) because this destroys value. Sure, this sounds a bit harsh, but if it dished out the surplus LVT as a Citizen's Income, we'd all be laughing.

[Roger]

Wait long enough and an advocate of Henry George's single tax on land will always come along...

GDP strikes me as far too vast and complex a measure to draw such wide conclusions.

For instance a significant part of the US and UK GDP in the period you're measuring would have been made up of money generated by our successive housing bubbles and the teetering inverted pyramids of derivatives the bankers built upon them.

With the partial exception of Spain (which at least at the end of the period had the property bubble but whose banks behaved more sensibly than ours), the lower growth countries on your list avoided creating such artificial property, credit and derivatives bubbles.

(which I suppose is one point for the Georgists)

And doesn't having the world's only international reserve currency also push up US GDP?

What would be interesting would be to break down the GDP of all these countries and compare key elements rather than loading at the grossly misleading top level number.

What this would presumably show is that although no country is insulated from the world economy, govts can and do make significant decisions that do dictate what niches they occupy and where in the various components of GDP league tables they turn up.

Are we going to be a debtor country or a creditor country? are our tax and regulatory systems going to favour finance or manufacturing capital? are we going to spend 20 or 30 or 40 or 50% of GDP on public services?

Now there is an argument of despair (which certainly seems to dominate both main parties in the UK) that after a certain point of development govts can no longer make such really fundamental decisions and are locked into their particular role in the world economy - and in this sense alone we can envy a year zero country like Japan and Germany in 1945, S Korea in 1953 or China in 1975 that has a blank slate to start with.

Clearly nothing Darling or Osborne - or even St Vince - can do will turn us from a country dominated by the most rapacious of finance capitalists to a boringly virtuous hard-saving and hard-working manufacturing nation like Germany or Sweden (and given how dependent the Germans and Sweden are upon selling their high tech and high priced manufactures to deranged wastrel nations like ourselves I am not even sure that is a good idea anymore).

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[reason]

Per capita? One way to promote growth is to encourage immigration and birth rates.

[reason]

William,
the comparison is over 27 years. I think your point is completely irrelevant over that timeframe.

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