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Truth from the Fraser Institute?

Yesterday’s Financial Post featured a rather strange op-ed by the Fraser Institute’s current and former directors of fiscal studies:

Most Canadians are unfortunately not aware of Canada’s 15-year track record of reducing the size of government (1992-2007). Since peaking in 1992, the size of government in Canada – best measured by total spending at all levels of government as a share of gross domestic product – has decreased from 53% to less than 40%, according to data from the Organization for Economic Cooperation and Development.

These figures are correct. Indeed, Andrew posted them on this blog more than two years ago (they did not change much from 2006 to 2007).

But the Fraser Institute in general, and the authors of this op-ed in particular, spent most of those 15 years railing against the allegedly increasing size of Canadian government. Are they now admitting that they were incorrect about what was happening to the size of government?

Fraser Institute types used to contend that public spending as a share of GDP was the wrong measure. They preferred public spending per capita adjusted for inflation, a measure almost guaranteed to show ever-expanding government over any extended period of time. Now, they agree that public spending is “best measured” relative to GDP.

Why the change of tune? The authors are trying to promote an IMF study showing that countries which cut public spending more, relative to GDP, enjoyed better economic performance. One must ask which way the causation runs. Obviously, it was easier for governments to reduce spending more, relative to GDP, in countries where GDP was growing faster. Furthermore, the need to maintain or increase public spending would often have been strongest in countries with the weakest economies.

While emphasizing the comparison between countries that cut spending very deeply and countries that cut spending less, the op-ed ignores the fact that this period in which “most industrialized countries” did cut spending led to a global economic meltdown. The argument seems to be that, if you stop the clock in 2007, free-market economics has a pretty good track record.

However, on the way to this bizarre conclusion, the Fraserites make a couple of other points that have previously appeared on this blog. They note, as I did a couple of months ago, that “given President Obama’s recent budget, Canada will likely have a smaller government than the United States within the next few years.”

They also note that Roy Romanow slashed public spending as much (relative to inflation, not GDP) as Paul Martin and more than Mike Harris. I recently lamented Saskatchewan’s incredible shrinking government (relative to GDP) under the last two NDP Premiers.

Enjoy and share:


Comment from Stephen Gordon
Time: April 30, 2009, 6:40 pm

Not this again?

The *size* of government is essentially irrelevant to economic growth; it’s the *quality* that matters. If you make use of taxes that don’t harm economic growth, then economic growth won’t be harmed. If you spend the money in ways that don’t harm economic growth, then economic growth won’t be harmed.


Comment from Travis Fast
Time: April 30, 2009, 9:18 pm

Now if we could all just agree on what a large non-growth harming government would involve I am sure the world would be a better place.

The prejudice of most vanilla economists is not that the size of government matters but rather that government is more prone to harmful activity then the private sector. Public choice theory was developed just for this reason: to overcome the distinction between theoretical quality and practical reality. With that prejudice intact the size of government is merely a proxy for just how much harm the government can do.

Thus making the quality/quantity distinction in the eyes of the FI or much of the vanilla side of profession for that matter is akin to sticking lipstick on a pig.

Comment from Stuart Murray
Time: May 1, 2009, 8:39 am

Well, every clock is right twice a day. Marc, I disagree with your implication that reduced size of government caused the meltdown. I think it was mostly a regulatory failure, and deregulation was only sitting in the rear passenger seat of the neocon fiscal contraction vehicle.

I actually like Stephen’s characterization of the quality/quantity issue. For example, I think indirect taxes are regressive and bad, unless they are nailing a sector you actually want to kill, like tobacco or carbon emissions. Likewise, I think it’s a bad idea to give tax revenues back to randomly-selected industries which happen to have a high profile, a unionized white male workforce, and a location in politically dominant ridings.

On the other hand, taxing profits and high incomes and spending the money on health, education, and welfare are cost-effective, good for the economy, and passable amongst over 50% of voters. Then you can bolster that with innovative stuff that is further to the left, but only as long as the government gets re-elected.

Comment from travis fast
Time: May 1, 2009, 9:22 pm

If taxing something was sufficient to kill it, people would own more physical and less human capital.

I was not arguing the distinction between quality and quantity was not correct, and SG is far from the first one to make this observation: it has been a staple of progressive argumentation since like ever.

The real debate is over what constitutes growth augmenting versus growth destroying state activities. And I am sure that if we did a good study outside of Zimbabwe like experiments we would find that in a given environment some activities were growth augmenting but in others growth destroying.

I would also note that sometimes quality gives way to quantity and quantity gives way to quality. But even Hegel got bored of flipping vacant dualisms on their head.

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