The findings of this paper show a strong and persistent negative relationship between government expenditures and growth of GDP, both for the developed economies of the OECD and for a larger set of 60 nations around the world. After several decades of declining growth rates, the conventional wisdom is that high-income developed economies can no longer achieve and sustain real growth rates of 3.5 percent and higher. The evidence presented in this paper provides another view. More rapid growth is possible, but the higher potential growth can only be achieved if we are willing to reduce the relative size of government.
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James Gwartney is Professor of Economics and Political Sciences at State University of Florida.
Randall Holcombe is DeVoe Moore Professor of Economics at State University of Florida and President of the James Madison Institute for Public Policy Studies’ Research Advisory Counsil.
Robert Lawson is Assistant Professor of Economics at Capital University in Ohio and Director of Fiscal Policy Studies for the Buckeye Institute for Public Policy Solutions.