Is There Too Much Government in Developed Countries? A Time-Series Analysis of 24 OECD-Economies

The economic consequences of public sector oversizing have been analyzed in hundreds of scientific contributions. The empirical branch of this literature tries to measure these effects through the use of three main tools: cross-sectional analysis of countries’ samples, time-series analysis of individual economies, and panel-data analysis. Most authors conclude that the current size of the public sector is too big in their analyzed economies, thus leading to reduced output. For different reasons, however, the results of both cross-sectional and time-series analyses are open to criticism. This article aims to check the validity of the converging conclusions obtained by time-series analyses. To this end, a simultaneous-equation model is designed, which evades the critiques addressed to prior contributions. Application of this model to 24 OECD countries during the 1975-to-2007 period suggests that at least most of these have indeed let their public sector grow beyond the level that is optimum for their economic performance.