ECON: size of government negatively correlated with prosperity

Han Huang (hhuang@MIT.edu)
Fri, 11 Dec 1998 20:33:35 -0500

I did some number crunching. Using the G7 economic data, I ran a covariance analysis on Matlab and my least mean squares estimate showed:

1% GDP more spending
--> 0.35% higher unemployment
--> -$196 purchasing power per capita

1% GDP more taxation
--> 0.44% higher unemployment
--> -$334 purchasing power per capita (before taxes)

correlations

  0.94 spending-unemployment
 -0.41 spending-purchasing
  0.96 taxation-unemployment
 -0.60 taxation-purchasing

Now I made some faux pas--comparing % of GDP of 1996 with unemployment in 1998. But still, if you look at the taxation burden chart on:

http://www.access.gpo.gov/su_docs/budget99/guide/guide02.html

You'll notice the G7 data doesn't change that dramatically. Unemployment rates, growth, % of GDP. These don't change that dramatically over time.

Lessons:

-US and Japan are the least socialist. They also have the lowest unemployment figures. Japan is entering its 3rd year of recession-- basically the direct result of government intervention.

-France, Germany, Italy are the most socialist. They typically have double-digit unemployment (in contradiction to the OECD data I found, Germany reportedly has an actual unemployment rate of nearly 11%).

-Canada has grown more and more socialist, and it's unemployment has been 8+% compared to the US's below 5% as of recent year. Canada has been growing slower, and has significantly less purchasing power than the US.

-United Kingdown under Thatcher/Major has been reducing its tax burden. Not surprisingly, it has been outperforming the continent, thought not by all that much.

You can look up the 1997 G7+Russia data on the US State Department:

http://www.state.gov/www/issues/economic/summit/fsg7data97.html

Observe that the more socialist a nation is, the higher its unemployment rate, and in general the less wealthy it is.

-Han

*--------------------------------------------------------------------*

Stats are taken from:

http://www.oecd.org/publications/figures/pubsec_a.pdf GOVT BURDEN AS % OF GDP

                           public sector
        revenue   spending  employment
Canada    42.7     45.8      19.6       1995
France    48.2     51.6      24.9       1996  
Germany   45.9     46.6      15.4       1995
Italy     44.5     49.5      16.1       1995
Japan     32.0     28.5       6.0       1995
UK        37.2     42.3      14.1       1994
US        32.1     34.3      13.4       1995
--------------------------------------------
          37.1     38.7

http://www.oecd.org/news_and_events/new-numbers/sur/nw98-119a.htm UNEMPLOYMENT RATE (10/98)

Canada   8.1
France  11.8
Germany  9.3
Italy   12.3 (7/98)
Japan    4.2
UK       6.2 (8/98)
US       4.6
------------
         6.7

http://www.oecd.org/std/nahome.htm
1996 PURCHASING POWER

                 exchange   purchasing
    CANADA         19,330   21,529
    FRANCE         26,323   20,533
    ITALY          21,127   19,974
    JAPAN          36,509   23,235
    GERMANY        28,738   21,200

UNITED KINGDOM 19,621 18,636
UNITED STATES 27,821 27,821

(the 1998 figures favor the US significantly more)

http://www.oecd.org/publications/figures/demo_a.pdf 1996 population figures (in thousands, and in % of G7)

Canada   29,964  ( 4.42%)
France   58,380  ( 8.61%)
Germany  81,877  (12.08%)
Italy    57,473  ( 8.48%)
Japan   125,864  (18.57%)
UK       58,782  ( 8.67%)
US      265,557  (39.17%)