Some memories last. Such as do the ones, which relate to my graduate studies of economics at Harvard. Amongst the most interesting lectures, which I ever attended, were those given by Prof. Jeffrey Sachs, one of the world’s most influential economists and a very incisive mind. He liked to say that there were geographic explanations for many economic phenomena in the world. Why do I recall this now?
The other day, I noticed a graph with OECD data, which compared the government’s size (measured by relative government expenditures) among the member countries of this rich countries’ economic club. The data from 2018 reveal that the government’s size varied from the low of 25,4% of Gross Domestic Product (GDP) in Ireland to the highest of 55,9% GDP in France. Not a big surprise. However, what is perhaps surprising is that the data show that Switzerland has a relatively small government (33,7%GDP) while the US had government expenditures at the level of 37,8% of GDP in 2018. Even if simplifying a bit, one would typically expect that countries with a bigger government would also better provide for public goods.
Seen in this context, the comparison between these two rich countries is in a way mind-boggling. While their estimated GDP per capita in 2020 in PPP is broadly comparable (the US has GDP pc 63 ths dollars Switzerland GDP is 67,6 ths dollars), any visitor to both countries will notice a remarkable difference in the quality of provided public goods. Local infrastructures such as roads, bridges, train stations, or public premises in general look in much better shape in Switzerland than in the US, at least visually. This visual difference is much more significant than would be implied by slightly higher income per capita in Switzerland.
Why such a difference? What makes the US – probably the most advanced country in the world – lag behind Switzerland in the quality of public goods provision even though it has a bigger government? Yes, one explanation might be relative government efficiency – perhaps the Swiss get it right here too. Also, different preferences for a structure of government expenditures (investment vs. consumption) probably play a role.
However, it appears that the fact that the US is a geographically large country might be an explaining factor too. A vast country with a relatively low density of population (34 people per sq km vs 207 in the case of Switzerland) means that the geographical intensity of economic activity is much lower in the US than in Switzerland. Many dispersed cities, small towns, and villages need to be connected by road, train, electricity, and perhaps other infrastructures – all of this takes substantial resources, whether for construction or repair. Yet economic intensity per sq km to support this infrastructure is low in the US. Of course, this is just simplification – what really seems to matter is not only the size of the country but also the geographical distribution/dispersion of economic activity within the country. How this precisely works, I leave to economists expert in spatial analysis.
Nevertheless, it should be safe to say that the geographical distribution of economic activity which is partly determined by the size of the country helps explain the level of infrastructure spending in the country -i.e. should have a bearing on the overall size of the government.
Relatedly, some homework for readers to crack: Do the frequent earthquakes on the West coast implying a preference for not living in tall buildings and an ensuing low geographical economic intensity go some way towards explaining the fiscal problems of southern California?
29 October 2020