Abstract
The purpose of this paper is to explore the association between government size and economic growth in the United States using time-series data over the period 1950–2007. In particular, this paper examines the effects of two key components of government expenditure, namely, government consumption and government investment, on US economic growth. A simultaneous-equation model is used to deal with the problem of bi-directional relationship between government size and economic growth. The results suggest that an increase in government consumption slows economic growth, while a rise in government investment enhances economic growth. Furthermore, the results also show that government investment crowds out private investment. Therefore, the overall effect of total government expenditure on economic growth is ambiguous.
Highlights
The size of US government grew dramatically during the 20th century
The 2009 Congressional Budget Office (CBO) report [1] estimated that government expenditure would be equal to 24.9 percent of GDP in 2009, a size only exceeded during the later years of World War II
A large number of previous studies investigating the output effect of government size suffer from a potential critical simultaneity problem which especially becomes severe for studies based on single-equation models using data over a long time period
Summary
The size of US government grew dramatically during the 20th century. The 2008 stimulus package in response to turmoil in the housing and the financial markets that primarily led the US economy into the longest and deepest recession since World War II was expected to result in a massive increase in the size of US government. Researchers (e.g., Musgrave [10]; Goffman and Mahar [11]; Gupta [12]; Bird [13]; Ganti and Kolluri [14]; Gandhi [15]; Henrekson [16]; Bohl [17]; Payne and Ewing [18]; and Wahab [19] to cite just a few) have empirically tested and analyzed the law Since most of these researchers provided empirical evidence supporting the presence of Wagner’s Law, it is reasonable to assume that there might exist a bi-directional relationship between government expenditure and income growth. A large number of previous studies investigating the output effect of government size suffer from a potential critical simultaneity problem which especially becomes severe for studies based on single-equation models using data over a long time period. This paper, constructs a SEM to explore the growth effects of government size
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