A big government's failure....has not come yet.

Today, I was looking at the Eurostat to figure the correlation between unemployment rate and the government spending. The typical right wing argument on this issue is that government does not create jobs and government spending is simply moving the problem from one place to another. When I looked at European countries government expenditure data, it surely appeared so.

All these countries have well above 40% of the government spending to GDP ratio. Sweden and Greece have no significant difference. The former is doing well, but the latter is not. No correlation between government spending and unemployment rate seems to exist.

Unfortunately, it is a statistical bias from loose specifications and Type II Error. First, if you do not specify which variable will significantly affect the outcome, then your result will be skewed. In this case, if you just call government expenditure all the same thing, then you are making this mistake. This mistake causes Type II Error, which means that you are not rejecting false null hypothesis, which is that the government does not create jobs. Let's look at the next graph.

     

If you compare Sweden's social benefit spending and Greece's equivalence, then you will realize that Greece spend much more. Then, you may hastily conclude "the greater social spending, the higher unemployment rate." Then you make a fallacy of reverse causality. Actually, Greece spends more on social benefit because it has higher unemployment. Finland spend more than Italy and Spain simply because its welfare benefits are much more generous than them. It will be clearer if you look at the next graph on unemployment rate.

As you can see from the graph, all those troubling PIIGS have relatively high unemployment rate. This has driven their governments to spend more on social benefits. Then, however, still you may think government spending is irrelevant to creating jobs. I'm not one hundred percent sure, but I suspect government spending indeed creates jobs and waters down crisis in better-off countries. Let's look at the next graph. 

Those better-off countries have much greater government output level. I was not sure in the first place what "government output" means. However, I've figured it refers to anything produced by government. In those countries, the governments manage such a lot of things as research, education, transportation, healthcare, and even housing. Since all those goods and services are produced by government, they really add jobs to their economies. Somewhat a big government isn't necessarily bad.