The Economist on the growth of government
The Economist devotes its last cover to “The triumph of big government”. The brief is an interesting piece on governments getting bigger all the time. A citation of Bob Higgs’ Crisis and Leviathan would have been nice, as the piece deals with the core ideas of that, marvelous book, but to its credit The Economist interviewed and quoted a couple of libertarians, like John Cochrane, Johan Norberg and Mark Littlewood of the IEA. Mark is credited with the only thing which looks like a proposal in the entire piece, albeit a vague one. He suggests allowing people to pay less in taxes in return for renouncing some state services. If the tax cut is attractive, but still less than the cost of supplying the service, that saves money”. But, writes The Economist, “because the people keenest to step out from under the umbrella of the state will always be those who already rely least on its protection, the state’s tax revenue would probably decline by a lot more than demand for its services.”
The article insists on the many forces behind government growth and quite correctly puts the decade of the 1980s in perspective. Though Reagan and Thatcher’s rhetoric produced such a shock on the international left that they are still dreaded by many, in fact the cases in which government spending was reduced are very few:
Examples of genuine state retrenchment in developed countries are few and far between. Sweden managed it in the 1980s. In the early 1990s Ruth Richardson, then New Zealand’s finance minister, cut the size of the state drastically. Wags called her plan “Ruthanasia”. The patient did not die. State spending is now six percentage points lower as a share of GDP than it was in 1990. But this is a rare achievement, and perhaps one doomed to pass. Grant Robertson, the current finance minister, pledged to “address the most inequitable of the changes made 30 years ago” as he promised a large boost to welfare payments.
Even austerity, The Economist writes, has been little more than a left wing scapegoat:
Some countries buck the trend, a bit, for a while. Germany’s spending as a share of GDP in 2019 was the same as it was in 2006, Angela Merkel’s first full year as chancellor. But the stable level was also a pretty high one. And German attempts to impose frugality elsewhere were short-lived. Spain and Italy both went on courses of strict austerity during the euro-zone crisis of the early 2010s. But in both cases public-sector spending, relative to GDP, was higher in 2019 than in 2006.
The magazine’s editorial asks how classical liberals should respond to the new era of Big Government which has been ushered by the pandemic and generous fiscal policies made possible by non-conventional monetary policies. Its response is a catalog of good intentions:
One task is to maximise the role of markets and individual choice. Climate change should be fought with a price for carbon, research-and-development subsidies and highly scrutinised public investments, not by rationing flights, promoting green national champions or enlisting central banks to distort financial markets. The welfare state should focus on redistributing cash and letting those in need choose what to do with it, not setting up new bureaucracies such as President Joe Biden’s proposed federal child-care system. Taxes should be broad-based and friendly to investment.
The state must also seek to be nimble and efficient. Income support for households should be automated where possible as the financial sector becomes more digitised. Much form-filling can be eliminated, as Estonia’s war on paperwork has shown. If there were fewer, better-paid bureaucrats, the public sector could attract more talented staff. And politicians should be willing to start afresh when tackling new problems, rather than relying on lacklustre incumbent departments. The biggest successes of governments during the pandemic have come from internal startups like Operation Warp Speed, which helped bring about America’s development of vaccines.
The state should strive to be impartial. Narrow interests, whether the unions and anointed victim groups favoured by the left, or the right’s chums in business, will always seek to capture it. To resist, bureaucrats do not need relentless cynical, self-serving attacks on their integrity from politicians, but transparency and support for the ethos of public service. Though rising total spending on the old is justified, a full-scale gerontocracy is not. Retirees with deep pockets do not need public handouts. On the contrary, they should bear a heavier burden as taxes shift from wages, towards property, inheritance and consumption.
We have here something which is often troubling in classical liberal accounts of current affairs. Classical liberals tend to be realists: they see the “objective” forces behind government growth (pressure groups but also, for the Economist, “prices of the services welfare states provide, such as health care and education, grow faster than the economy because of their high labour intensity and low rates of productivity increase”) but then, when it comes to a positive program, they come up with a few good ideas which would nonetheless require a profound modification in the very system of politics which produced bigger government in the first instance. We tend to be (me included) consistent realists when it comes to the reason why we got here, but idealists when it comes to how to move forward, by appealing to the best sense of the people and leveraging the rationality of our message. Does this work? I would have expected, in the Economist’s piece, some attempt at creative constitutional engineering. Tipping points could be searched for to make the growth of government at least a bit more difficult. When it comes to how (if) the growth of government could be slowed or stopped, there are two relevant questions the Economist seems not to consider.
The first one is to what extent is the growth of government economically harmful. Are people suffering, and will they be poorer because of it? Who will it harm the most? Answering this question will be useful to try to identify who could be the next constituency for limited government. The Economist seems to think that, since the world is more complex, governments needs to do more, hence the case for classical liberalism is intellectually more challenging now than it was at Thatcher’s time. I don’t think that is the case. Actually, perhaps the sophistication of the argument of statists would be an interesting test for that assumption. Do we find contemporary advocates of bigger governments to be more sophisticated than, say, John Maynard Keynes or William Beveridge? My impression is that the argument for government is actually less sophisticated and simply assumes that government is the best answer to a whole series of problems, without proving very much. I think the problem is different. In Thatcher’s time, it was pretty clear that the constituency for reducing the scope and action of government lay within the productive middle class that saw itself as penalized by taxation and regulation and which retained a strong culture of autonomy and self help. Is that still the case now? It seems to be that it is now, but another constituency for a smaller government hasn’t been found yet.
Nov 27 2021 at 1:21pm
Very interesting post, Alberto! I read the two Economist articles yesterday and was myself tempted to write something for our preferred blog. But I didn’t quite know by which horn to take the bull. I agree their proposals are very weak, but I reflected that these articles are still an improvement: perhaps The Economist is finally realizing that we are on the road to serfdom? They even mention public choice theory by name! I also thought that perhaps, after all, I won’t replace my subscription to the Economist by one to the Backwoodsman.*
*Peachey Carnehan and Daniel Dravot had been fake correspondents of the Backwoodsman in Kipling’s delicious novel The Man Who Would Be King:
Nov 27 2021 at 3:45pm
Peddling a play-nice-with-the-left “CLism” seems to be the survival strategy—not just at The Economist. If they didn’t play nice, they’d be punished, canceled, etc. If they went plainly lefty they’d be abandoned by non-left readers.
Nov 27 2021 at 6:23pm
Great article! But I think libertarians see the task as much easier than it is. We assume that because people are rational in the marketplace they are always rational. Socialists make the opposite mistake, thinking people are never rational.
People are rational in the market because they deal with short term objectives with easily calculated cost benefit analysis. But the market relies on people holding to certain long term values that conflict with short term ones. Dor example, property rights conflict with theft.
Hayek wrote in fatal conceit that markets depend on religion to perpetuate prohibitions of theft and other long term values for which people can not see the short run benefits.
Culture Matters: How Values Shape Human Progress by Samuel P. Huntington makes similar points.
The classic Envy: A Theory of Social Behavior by Helmut Schoeck shows that envy permeates every society and destroys innovation. Christianity maged to suppress envy enough to allow for innovation and economic development.
As Christianity has declined in the West, envy has exploded and made socialism popular. Envy is the power behind socialism and the idolatry of the state.
The solution to big government is an old fashioned revival or convincing nonreligious people that envy is evil.
Thomas Lee Hutcheson
Nov 28 2021 at 7:29am
It seems that government growth is the effect of three things. A) economic growth creates new externalities where none existed in the past. (Increase of CO2 in the atmosphere) B) Growth means more complex interactions some of which fit poorly into the willing, informed buyer- willing informed seller. (Pharmaceuticals, spam calls). C) Redistribution is a normal good. As people become richer, they are willing for more of their income to be used to help the less fortunate.
Of course growth could be slower if government were more efficient. Income redistribution is done better with an EITC than a minimum wage. Air pollution could be taxed rather than have specified technologies mandated. Regulation would be less costly if regulators were better focused on the markets failure they were supposedly trying to correct.
I agree that none of these would produce growth in the percentage of government consumption to GDP or even G plus the deadweight loss from taxation indefinitely. There could be Kuznets curves lurking around the technological bend.
Nov 28 2021 at 7:30am
There’s a simple, but not easy, approach to limiting the growth of government:
Vote with your wallet and feet away from big government locations to places with smaller government.
That will have a marginal impact on global money-weighted tax rates, and a big impact on your own situation.
Thomas Lee Hutcheson
Nov 28 2021 at 8:53am
As what to do about government growth? Surely if Liberals can identify structures that systematically make for less efficient responses to demands for government interventions, we should promote them. (Policies for covid spread abatement should be made at the local level with estimates of local costs and benefits rather than national or state level but state-wide zoning laws might be less subject to capture by hyper-local NIMBYs.)
When discussing specific issues when some inefficient measure is proposed — green new deal to combat CO2 accumulation in the atmosphere or a minimum wage to transfer income , I think it is better to propose less costly ways to achieve the same objective (wage subsidy, tax on net CO2 emissions) rather than just point out the costs of the proposed measure.
Nov 29 2021 at 9:08am
There is actually no shortage of voters who will tell you that they are firmly within the “constituency for a smaller government”. The problem is that their actual voting behavior does not reflect such priorities – e.g. they also maintain that their 2016 and/or 2020 votes for Trump constitute a demonstration of their fealty to this constituency’s principles
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