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Is there a limit to the size of the state? The scope conditions of Wagner's law

Steven M. Karceski and Edgar Kiser

Journal of Institutional Economics, 2020, vol. 16, issue 2, 217-232

Abstract: We investigate the relationship between economic development and the growth of the state by testing Wagner's Law. We begin with a general test, and find it does not hold in all cases: it breaks down at higher levels of development and in more recent time periods. This suggests that Wagner's law has specific scope conditions, beyond which states do not continue to grow as economies grow. We use a series of models to explore the temporal scope of Wagner's law and the point at which state growth may hit a ceiling. We conclude limits on the growth of the state are set by limits on the capacity of states to increase taxation. States can avoid this problem temporarily by running budget deficits, but eventually accumulated debt forces them to cut expenditures. Spending is tied to tax revenue like a rubber band, it can stretch only so far before being pulled back.

Date: 2020
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Handle: RePEc:cup:jinsec:v:16:y:2020:i:2:p:217-232_8