If provinces and states are too big (or too small) it’s a problem

Are some Canadian provinces and U.S. states just too big? Are others too small?

The largest Canadian provinces and U.S. states are roughly 80 times bigger than their least-populous counterparts. Ontario is roughly three times larger than both British Columbia and Alberta while the most populous U.S. state, California, is roughly one-third larger than the second-largest (Texas) and roughly three times larger than states such as Pennsylvania and Illinois. If they were independent countries, Ontario would rank among the top 75 and California among the top 40 most populous countries in the world.

We know government has a large effect on our economic well-being, and the question naturally arises whether these large differences in population impact how well government works in these states and provinces. We already know that for cities, size matters. Research has found that cities of around 3 million are the most effective and fastest growing. However, no prior studies had examined this issue for the size of provincial and state governments.

Over the past two years I set out to study this issue in a series of research reports, and the answer I have found is that size matters—a lot. Not only does the size of these jurisdictions affect how efficient they are at producing goods and services for their constituencies, but it also influences the effectiveness of democratic decision-making. As size increases, some of these factors tend to improve, while others tend to worsen, government outcomes. For example, consider how inefficient and ineffective it would be if the entire population of Canada or the United States were divided into only two provinces or states, or alternatively into a thousand small ones.

In general, when examining the overall quality of the economic policies of provinces and states, it turns out that being in the middle is best—roughly a population of 9.5 million.

Tax burdens as a share of the economy, for example, are larger in provinces and states that are either too small or too big. Government spending (as a share of the economy) follows a similar pattern, being lowest in middle-sized provinces and states. These results are consistent whether or not one includes the activities of local governments to control for variations in which government programs are decentralized across provinces and states.

The broadest measure I considered, the Economic Freedom of North America index, also follows a similar pattern. This index measures the overall quality of economic policies in each province or state based on a variety of data on government spending, taxation and regulation. Other research has demonstrated a close relationship of this index with levels of economic prosperity, growth and entrepreneurship. Thus, simply put, large provinces and states such as Ontario and California are so big they have a disadvantage at generating growth and prosperity for their citizens.

California’s population has grown from 7 million to almost 40 million in the past eight decades, and there’s growing support for initiatives to split it into multiple smaller states. Doing so might improve economic policy and economic outcomes for people who live there. Similarly, some provinces and states are so small they cannot fully take advantage of the economies of scale in providing government services that help lessen the tax burden on citizens. These jurisdictions could benefit from in-migration or mergers with other jurisdictions that could increase population.

In the end, size matters for the fiscal outcomes of subnational jurisdictions in Canada and the U.S. Either being too big or too small results in an economic disadvantage for the economic well-being of people living in these provinces or states.