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V I N C E N T A.

M A H L E R

MEASURING P U B L I C S E C T O R S I Z E IN T H E
ADVANCED MARKET ECONOMY COUNTRIES:
T H E P R O B L E M OF D E F L A T O R S

(Accepted 27 January, 1992)

ABSTRACT. A great deal of scholarly attention has been directed to understanding the
causes of the growth of the public sector in the developed market economy countrie s in
recent decades. Unfortunately, this literature has been clouded by uncertainty over
measurement of the central variable at issue, the relative size of the public sector.
Traditionally, public sector size has been measured as the ratio of government expendi-
tures to GDP, with both figures expressed in current national currencies. Recently,
however, this standard approach has been criticized by those who argue that figures for
government expenditures and GDP should be separately deflated to account for
different rates of inflation in the public sector and the economy as a whole. The
purpose of this paper is to explore the empirical relationship between same- and
different-deflator indicators of public sector size, focusing on social expenditures in 19
developed market economy countries over the period 1960--1981. The analysis finds
that same- and different-deflator indicators are generally strongly correlated and that
the choice of deflators, while of some importance, is not of overriding significance in
assessing four major explanations of public sector growth in the countries examined.

THE DEFLATORPROBLEM

A great deal of scholarly attention has been devoted to the growth


of the public sector in the developed market economy countries over
the last three decades (see, for example, Cameron, 1978; Pampel and
Williamson, 1988, 1989; Swank, 1988). Unfortunately, the literature
on government growth has been clouded by uncertainty over the
measurement of the central variable at issue, the relative size of the
public sector. Traditionally, public sector size has been measured as the
ratio of government expenditures to the total output of the economy
(usually indicated by GDP), with both figures expressed in current
national currencies. In the last decade, however, this standard approach
has come under increasing criticism. The main objection is that tradi-
tional public expenditure/GDP ratios neglect the likelihood that the
cost of providing services in the public sector will grow faster than costs
in the economy as a whole. As a result, it is argued, these ratios will

Social Indicators Research 27:311--325, 1992.


9 1992 KluwerAcademic Publishers. Printed in the Netherlands.
312 VINCENT A. MAHLER

tend to overstate the scope of the public sector, suggesting that rapid
growth has occurred even when there has been little change in the level
of public goods and services actually delivered. Empirical analyses of
the U.S. case by Beck (1976, 1981) and Berry and Lowery (1984,
1987) indicate that when figures for public sector expenditures and
GDP are separately deflated in a way that accounts for different rates
of inflation in each, the growth in public sector size of recent decades is
in fact far smaller than is commonly supposed. In the view of Berry and
Lowery, the implications of this seemingly narrow and technical
measurement issue are potentially quite serious. They conclude that
since "the bulk of empirical testing of modds of government growth has
been conducted without appropriately deflated indicators . . . much of
our knowledge about the factors responsible for changes in the scope of
government activity may have to be reevaluated" (1984: 1202). 1
This critique of standard measurement models has not gone without
response. Alt and Chrystal (1983: 189), for example, argue that

higher government costs may reflect relativelyexpensive goods (for example, labor)
rather than extraction from the economyof more real goods. This is in the nature of
government activities. Use of a separate government deflator to calculate real public
expenditures will underestimate governmentgrowth whereas use of the GDP deflator
or some other general price index can exaggerate public resource consumption by
inflating the "price" of all non-market goods in the governmentsector. Believingthat
the almost right is better than the obviouslywrong, any comparisons of real growth of
governmentexpendituresand GDP shoulddeflatebothby the samedeflator.

Similarly, Lewis-Beck and Rice (1985: 6) suggest that for many


purposes "the unadjusted measure is preferable because it gives a
better picture of government scope and power vis-a-vis the national
economy."
Which indicator, then, is preferable from a theoretical perspective?
The answer, as is commonly the case, depends on the alms of a
particular study. If the concern is to identify changes in the scope of the
goods and services actually provided by the public sector, the different-
deflator indicator is clearly better, since only it would identify cases in
which rapid growth in public expenditures masked a stagnant or even
declining provision of goods or services. If, on the other hand, the aim
is to assess the size of public expenditures relative to the national
economy as a whole, the same-deflator indicator is preferable. Debates
over public sector size often speak to the cost of government activities,

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