Why America can't have small government (and China can)
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”
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:
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?
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.