American Exceptionalism Reconsidered, Pt. 2: The Size of the State

In this second part of a series of posts on American exceptionalism, I consider the common claim by the American right that the American state is particularly small relative to those of other advanced democracies, and that this fact helps to constitute a desirable “American exceptionalism,” featuring higher economic growth and more respect for individual liberty.

There is no doubt that the American state appears to be small in international comparisons, particularly when GDP is used in the denominator. Thus, public and mandatory private social spending (spending on old age, disability, unemployment, health, housing, active labor market policies, and similar programs) as a percentage of GDP was 16.3% in 2005, the last year for which data are available from the OECD. (This figure includes all levels of government.) By comparison, the figures for Sweden, the UK, and France were 29.8%, 22.1%, and 29.5%, respectively. The only rich democracies close to the U.S. were Canada (16.5%), Ireland (16.7%), and Slovakia (16.8%). The first point to make about these statistics is that they overstate the differences between the U.S. and apparently more freely-spending countries, because the latter group of countries, as a rule, also tends to tax social benefits at much higher rates than does the U.S.

However, a broader measure of government impact on the economy also seems to support the American exceptionalism thesis. Government consumption share of GDP represents the portion of the economy that goes toward maintaining government operations: the government’s payments to workers and on goods and services. On this measure, the U.S. sat at 17.7% of GDP in 2010 (again, including local, state, and federal), compared to 24.7% in the UK, 28.9% in Sweden, and 24.7% in France. However, here Switzerland beats out the U.S. at a mere 11.6%. So do South Korea (16.5%) and Greece (17.2%).

So the American state still seems rather small in comparative context. But is this smallness the result of American institutions, in turn largely the legacy of revolution and constitution-making over 200 years ago, or because Americans still today mistrust big government more than, say, Europeans? To answer this question, we can statistically model each country’s government consumption share of GDP with a bunch of economic and institutional variables. After estimating the model, we will be able to tell which factors predict “big government” cross-nationally, but we will also be able to see which countries demonstrate “unexplained variance,” that is, bigger or smaller government than our statistical model can explain. The most plausible explanation for this unexplained variance would be some kind of big-government or small-government cultural norm that could not be included in the model.

I have estimated government consumption and social spending shares of GDP for each rich democracy and each year as a function of fiscal autonomy (how much economic policymaking power regional governments have), the number of jurisdictions (states, provinces, whatever), fiscal autonomy times number of jurisdictions (since fiscal autonomy is more effective at limiting government when there are many jurisdictions competing), expenditure decentralization (this essentially measures the amount of money that central governments give to lower-level governments and actually increases the size of government), real GDP per capita and several lags (to capture the effects of economic growth), age dependency ratio (the proportion of the population under 18 or over 65), and religious fractionalization (a measure of how religiously diverse each country is). As expected, fiscal autonomy constrains government consumption, especially when the number of jurisdictions is large, but it does not affect social spending. Expenditure decentralization encourages bigger government, all else equal, GDP per capita increases spending while current-year growth decreases it, and the age dependency ratio increases spending. Religious fractionalization turns out to constrain spending, especially social spending.

Now what’s interesting for present purposes is less these statistical results than the cross-national comparisons of residuals. Which countries tend to have bigger or smaller governments than you would expect given where they stand on the aforementioned independent variables? To answer this question, I averaged over all the years available the model’s error for each country. I did this for both the social spending and government consumption equations. Here’s a plot of the results (click for a better view):

As you can see, the U.S. is right in the middle. If anything, the U.S. has a slightly bigger government than average, once you control for its economic, religious, and institutional profile. The really parsimonious citizens (on government consumption) are apparently found in Hungary, Ireland, Switzerland, and Japan, while the least egalitarian peoples (on social spending) are Japanese, Slovaks, Icelanders, and Norwegians.

In summary, there is very little evidence that Americans favor smaller government than Europeans and that that is the reason the American state is small – or if there is some small-government tendency among Americans, it is captured fully by their religious diversity. (Not religiosity, mind. I tested that – no effect.) More religiously diverse countries typically accommodated religious minorities early on or even disestablished their state religions; thus, they have some history of liberalism in this sphere, and that history may account for some of the results found. If the U.S. had French institutions, we’d have something close to their government too.

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