Empirical Regularities in the Growth of Government

Abstract

Meltzer and Richard (1983) test a model developed earlier (1981) of the size of government using a Stone-Geary utility function and annual data for the United States. They find that the ratio of government spending for redistribution to aggregate income, and the share of aggregate income redistributed in cash, rise and fall with the ratio of mean to median income and the level of (median) income. Redistribution in kind--the provision of education, health care, fire protection, and other services--also rises and falls with the ratio of mean to median income, but it appears to be independent of the level of income.In this paper a model is tested which is more comprehensive than that developed by Meltzer and Richard in the sense that it incorporates exogenous factors such as the fraction of the population that is under 18 years of age and that which is 65 years of age and over, the total population itself, the degree of homogeneity in the population, and most importantly, the use of per capita income in place of the level of median income to test “Wagner's (1958) law”. Time-series data for the United States and for Canada as well as cross-section data for the United States and for OECD countries are used. The replication of the tests of Meltzer and Richard's model using more recent data for the United States and for Canada indicates that while it may be theoretically sound the data do not seem to be consistent with their rational theory of the size of government. Since the coefficient estimates of the variables normally used in the public finance literature are volatile in terms of sign and magnitude, their interpretation is difficult and thus this study confirms the necessity of the development of a sound theory of the size and growth of government as a prerequisite for the robustness of regression results.