Tuesday, July 19, 2011

Wrong Focus (2)

If big government is bad for growth, why does China grow so fast?

Here I review Noah's review of Tyler Cowen's review of a new paper written by two guys who don't even get their names in my post. Noah quotes the paper's big news:

An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation...

So the thing that here absorbs the focus of Noah, and Tyler, and the two nameless guys who wrote the paper, and me, and you, is the size of government.

It's not even economics, really.

Noah reiterates the part of that quote that I didn't reproduce here, and then offers three possible causal interpretations of the correlation the two guys say they found.

That ain't economics, either.

No, I take it back. It is how economists do economics: They like to see all sides of every petty little issue, and tie up discussions in suppositional knots.

No, I was right the first time. That ain't economics. Noah says

Which interpretation do you believe? I predict that it will depend on your politics.

See? Politics. Not economics. Noah discusses which of his three interpretations socialists would like, and which one librarians would like, or libertarians maybe, and which one Tyler Cowen likes, and other scholars, and which interpretation Noah himself likes.

Of course, as an economist, he does not even express his own view with confidence:

This would tend to fit with my own priors, and my own politics.

Would tend to fit?

Finally, Noah asks, "So why did Tyler Cowen post the link?"

But Tyler didn't leave a comment on Noah's blog to answer the question. So, who can say?

Well, this post is longer than I thought it was gonna be, and there's still no economics in it at all. But maybe I can squeeze some in.

The paper is by Andreas Bergh and Magnus Henrekson, who will no doubt sleep better tonight, knowing their names finally showed up in my post...

From the Abstract:

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach - of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP...

So. These two guys are "measuring government size as total taxes or total expenditure relative to GDP."

Relative to GDP.

And they reach the conclusion that an increase in government size is associated with a lower GDP growth rate.

The denominator problem strikes again.

They measure the growth rate by measuring changes in GDP. And they take the size of government relative to GDP. They have things are all tangled up.

If there is some ignored or overlooked factor that happens to cause a slowdown in GDP growth, and the two guys compare the growth of government to a slowly-growing GDP, they are quite likely to discover that government appears to be increasing in size.

Meanwhile, the real problem (excessive private debt) remains overlooked and ignored.


Jazzbumpa said...

Almost everyone - including you, amigo - has the wrong focus. Noah quotes the paper (emphasis added):

In fact, it is close to conceptually meaningless to discuss a causal effect from an aggregate such as government size on economic growth. Thus, several scholars in our view have rightly concluded it is more fruitful to analyze separately the mechanisms through which different taxes and expenditure affect growth. Not all taxes are equally harmful, and some studies identify public spending on education and public investment to be positively related to growth.

I would edit out the "close to."

jimcaserta's comment at Noah's is cogent.

My take: Growth is rate of change. Bigger things grow more slowly - DO'H! Big economies are found in big countries. Big countries have big government - more or less out of necessity.

So the clever authors have discovered something verging on tautology.

BTW, Tyler's surname is Cowan. He's a Libertarian from George Mason U. where he teaches his particular brand of religion.


Jazzbumpa said...

Also, separating economics from politics is artificial, and probably misleading. I mentioned somewhere recently - maybe even here - that politics and economics are that rare set of twins where BOTH are evil.


The Arthurian said...

Corrected the spelling. Thanks.