Is Big Government Inevitable? Desirable? Necessary?
Let’s start with two basic facts:
There is not a single thriving, prosperous country that does not tax at these levels, or engage in massive quantities of redistribution. Not one.
For me, this raises the conundrum:
It hasn’t happened. Not once.
So it’s easy to jump to the post hoc ergo propter hoc conclusion:
But of course you can argue the opposite causation:
I see two possibilities there:
#2 is, I think, the the argument that libertarians would make to explain the correlation between government size and prosperity.
I don’t know how to adjudicate in any definitive way between these two conclusions, or between [one of them] and the redistribution-“causes”-prosperity conclusion.
Given some correlation (necessary to even assert causation), the only way to convincingly demonstrate causation is to tell a coherent and convincing story about the process by which the causation happens. That’s what I did in my first Angry Bear post (well, you can judge for yourself how convincing it is).
Absent any definitive way to decide, for the time being I’m going to stick with the first-blush conclusion suggested by the correlation, and supported by my theories of causation:
Cross-posted at Asymptosis.
Goog post Steve. This issue of government has been on my mind a lot lately. “There is not a single thriving, prosperous country that does not tax at these levels, or engage in massive quantities of redistribution. Not one.”
What? Do you mean Estonia isn’t thriving and prosperous? I think the countries I’ve seen the Righties talk up lately are Malaysia, Ireland-before the crisis), Australia.
To elaborate your point further I might in all seriousness list the significant coutnries that do really come close to the libertarian model It seems to me these are mostly Estonia, Albania, etc, the old Soviet satelittes and-until recent years-many South American countries starting with Argentina that have since been more interventionist. The Asian Tiger economies I think it’s fair to say all follow your model of significant government spending as a percnetage of GDP
i wish you hadn’t used the word “redistribution.” That implies to a lot of people something like “welfare.”
Welfare is probably not needed for prosperity. Some rules… like the rules that make football and interesting game and not just the big guys beating up the little guys no holds barred… probably to work to promote more equal, and equitable, distribution. But that is not quite the same as Robbing Hood.
Meanwhile there is plenty of work for government to do to make us all richer. Work that does not lend itself to the private sector. Including regulating the private sector to keep it from doing us harm. That work needs to be paid for, and if it is paid for according to “ability to pay,” that will also tend to (re)distribute wealth… but it needent be and should not be “welfare,” if we can be smarter than that.
“What? Do you mean Estonia isn’t thriving and prosperous? I think the countries I’ve seen the Righties talk up lately are Malaysia, Ireland-before the crisis), Australia. ”
Righties talk up Australia, seriously? I’m surprised they’d want to remind people there exists a country with a $15.51/hr minimum wage, 5.2% unemployment, universal Medicare and a Social Security system so broad it would make Dennis Kucinich weep; and yes they do this spending less of their GDP on govt (all levels) that we do.
If I were an Econ grad student, I’ld write a paper exploring the possibility that the Coriolis effect makes macroeconomics run backwards in the Southern Hemisphere.
“So it’s easy to jump to the post hoc ergo propter hoc conclusion:
Redistribution is necessary for a prosperous country to emerge and thrive. It is at least a necessary (though of course not necessarily sufficient) cause of that prosperity.”
The author’s case against small government is best described as argumentum ad ignorantiam. Similar arguments were used often in the 17th and 18th century to justify religion’s role in government: “Since all the great nations have state backed religions, the idea of the separation of church and state must be false.” Or in the 19th and 20th century to justify large militaries: “Since all the great nations have top tier militaries, the notion of a prosperous nation with a small military must be false.”
“2. The growth of government is an emergent property of a prosperous economy,…”
This is the argument that could very well be true, although one would have to quantify what is prosperous and when government size does not fit the ‘small, libertarian/conservative’ model. In other words, are growing governments necessary for prosperous democracies? However, we do know that there have been times when great societies, ones that advanced humanity, have been characterized by small governments. The signoria led governments of Florence for example or the reasonable taxation in France under Napoleon.
Governments can and do become ineffective and inefficient, just like other organizations. Ignoring this fact to justify government’s growth does not do the left any favors in the debate.
Using a different word doesn’t make redistribution other than what it is. It seems that capitalism is a highly effective engine for pumping prosperity into the hands of a rather small elite. (Corporatism does it on steroids.)
My theory is that a top heavy society is unstable and will either lead to violence in the streets, harsh repression, or some other form of collapse.
Redistribution, via taxation, and enforced with regulation is a vital component is a thriving capitalist economy.
It’s also what we had post WW II until about the time of Reagan.
I wish you hadn’t used the word “wellfare” – it has negative connotations that I think are undeserved.
Gotta run. Playing tonight.
A countries wealth is created by its successful businesses. So, how does a country get to have successful businesses.
The answer is not great ideas. It is good customers.
Good customers are (by correlation) healthy, educated, and mobile. Thus businesses are caught in a Catch-22 that they must share their success with their customers in order to continue their success. Since businesses generally need workers with the same attributes as a good customer, the solution is clear. Distributing the proceeds to the workers makes good customers.
The problem is what I like to call the tragedy of the commons. If each business attempts to depend on some other business to do the right thing, all of the business’ customers will deteriorate. This problem should create new businesses – there are lots of potential customers who want to improve their quality as business customers. Unfortunatley, private enterprise really sucks at delivering education and healthcare to the masses.
Government-run education and government-run healthcare are awful until you consider the alternative. Education and healthcare both suffer strongly from diminishing returns as we try to educate people who resist being educated and as we try to keep dying people alive. Nonetheless, as our society keeps getting richer, we will keep trying for those gains. And government will grow.
Yes, larger, all-encompassing government does give great GDP growth. Look at Communist China lately or Nazi Germany in the ’30s.
Doesn’t mean I want to live in either. I am quite willing to trade off GDP growth for more freedom – though since there is little correlation between gov size and GDP growth I don’t see why I have to.
But, once again, it’s how big is big enough? I can redistribute without a Department of Education or a BATF or with a 50% cut in the Federal workforce. Or, to appease ilsm, without 100+ bases overseas. (And no one is talking about redistributing wealth at all – just income – no one is going to touch Gate’s billions.)
The US Gov crossed the 25% line around 1950 (excepting WW I and WWII excursions). It has been steadily increasing since roughly 1910, leveled off during the roaring 20s, then restarted back around 1932 and steadily grew through 1990 when it leveled off again until making a big jump in 2008 (when the banking crash reduced the denominator like it did in the early 30s). (See attached graph)
I see no direct causation between government size and GDP growth. A 25-50% spread of Government size is huge. We are sitting at the 40% mark. Why do you feel if we dropped to 35% and pushed that 5% back to the states that would be bad?
Really the question is why do you feel the central federal government needs increasing power over our liberties than it does today? We are inarguably less free than we were in 1990 or 1970. So why increase the leviathan?
Islam will change
Kevin makes great points, which perfectly reflect the problem of induction in trying to make an empirical case for any given political system.
And one last note:
We Tax at roughly a 20% rate, but spend at a 40% rate. The spread si why we have to cover 40% of our current spending with debt. With no end in sight by Obama’s own projections.
You really should read the bood, “This time it’s different.”
Islam will change
“Governments can and do become ineffective and inefficient, just like other organizations. Ignoring this fact to justify government’s growth”
Kevin, I think you might not have read carefully. I stated what I considered to be the strongest argument on you side (#2) and said “I don’t know how to adjudicate in any definitive way between these two conclusions, or between [one of them] and the redistribution-“causes”-prosperity conclusion.”
Just because I come down on the other side (based on my “story”) doesn’t mean I “ignored” that “fact” (by which I think you mean “story.”)
I’ll try to do a post summarizing all the cross-country (and cross-state) comparisons I’ve pulled together over the years, so we’ve got facts in front of us. For now, I’ll just say for now that I feel quite comfortable with the assertions at the top, can show you the numbers and graphs demonstrating them.
This post is really about how to interpret them, and what policy conclusions to draw from them. What stories they tell, what theories/explanations they support.
By 1850 the building blocks of modern financial capitalism were in place in the US.
From 1850 to 1950 with modern capitalism and small government trend US real per capita GDP growth was about 1.4%.
Since 1950 with modern capitalism and big government trend US real per capita GDP growth has been 2.1%, or about 50% higher.
When somebody explains this contrast away to me I will take the position that libertarian economics is a theory that is disproved by the data.
Dale, good point about word choices. I really want to do more figuring out language that puts this stuff across, and that appeals to people — independents and undecideds especially — who have been been hearing something very different for the last thirty years.
Mike, key in this discussion I think to distinguish between rapidly growing and already prosperous. Convergence/catch-up is probably the most-agreed-upon effect among international development economists. If you have no banking system, or factories, or highways or internet (etc etc), and you get some/enough of that stuff, you can really take off.
Rather than “redistribution,” I like phrases that usually apply to gardens or farms. An unfertilized, unwatered field, a field where the harvest is stripped right down to the roots, and worst of all a farm that keeps no seed grain, might do better by raw reckoning than a soberly run farm for a year or two, but will end up as a desert.
Also, a maximally efficient farm, one run within a hairsbredth of failure, WILL fail. The farm needs fat on it’s bones (mixed metaphor notwithstanding) or it is guaranteed to fail.
Businesses are useful to societies, but societies are essential to businesses. However, they are not very bright and don’t seem to realize this. Like Little Boy Blue’s cattle they are constantly trying to break down the fence and eat up the corn, because their focus is the next mouthful, not the following day’s stomachache or the following year’s famine.
“I see no direct causation between government size and GDP growth. A 25-50% spread of Government size is huge. We are sitting at the 40% mark. Why do you feel if we dropped to 35% and pushed that 5% back to the states that would be bad? “
Buffpilot, it’s all well and good to say you “see no direct connection” but that really just begs the question. If you think a 25-50 spread is “huge” give us the list of countries that are beneath that spread and let’s see what their GDP and overall numbers are. Then we can judge rather than just resting on you not seeing something,
As for “pushing 5% back to the states” as the states are already scrapped that wouldn’t be good. What it would mean is fruther cuts in already meager social spending, In a recession when consumption is down this would be bad
Buff–I didn’t agree with or benefit from the Bush tax cuts. I opposed the Iraq and Afghanistan wars. So, I would say that merely to increase taxes to a reasonable rate and stop killing people in foreign countries would probably be a good way to meet our govt’s expenses. Then we can talk about what size the US govt ought to be. NancyO
Pushing back to the states wasn’t practical to begin with or we would have never abandoned that practice back in the 30’s. Little example: The CCC and WPA paved roads and built bridges in GA that had not existed until then. The REA electrified counties in GA that had no electricity outside of towns or major cities. Why? Well, Talmadge and Russell finally realized that the US govt could do things that individual states wouldn’t/couldn’t do. And, just sat back and let it happen.
And, then, wouldn’t you know it, public schools finally became the norm rather than the exception. Court houses that had been falling apart got rebuilt. In the old days in GA, there was no need to tax people to provide these basic public goods. All you had to do was ask the plantation owners (yep,and we still have them) and successful business owners and they’d tell you. “People are happy the way they are.Raisin’ taxes ain’t right.” Right. States have rights. But they can’t or won’t do what the entire country can do by pooling its resources. NancyO
have fun. but words matter. things are what they are. most of the time people stop at the word and let it mean whatever associations they have with it.
what does your logic book say about false analogy and straw men?
Roth hardly “ignored this fact to justify…” he merely observed that big government did not seem to lead to less prosperity. of course governments become inefficient. that’s why we have elections. to save us the trouble of revolutions.
I think you are right, and I am not disagreeing, but can’t help pointing out that the Soviet Union increased its wealth from 1917 to 1957 or so from “backward” to “world power” without what you would call “business.”
you might not like its methods, or the way it used its wealth, (I certainly don’t) but neither should you just accept the catechism that “(only) business creates wealth” or worse “government doesn’t create wealth.”
the federal government had less power over my liberties for the past forty years than it had over yours. but that was your choice.
there is great danger from government power, but your friends… and the democrats too… are busily undermining your serious liberties while pretending to cut your taxes… which is all you mean by liberty.
i’d be glad to work with you to protect our liberty and cut our taxes, but we won’t get very far by chanting fairy tale verses to ourselves.
“that’s why we have elections. to save us the trouble of revolutions. “
Yes good point Nancy. It seems to me that the most powerful rebuttal of libertarian ideology is a simple empirical examination of the evidence.
Like for those who claim Social Seciruty should be privatized what does history show? That prior to SS a large portion of old people were broke in retirment. Since SS this number is very small. The elderly went from being a very much endagnered group economically to the most secure.
i hope you meant “until”, not “when.”
I think you need to look more closely at what makes a coutry prosperous in the first place. Historically the US had a relatively small government while it was establishing itself as an economic powerhouse. Spending was less than 20% of GDP until the 1930s. Singapore still spends less than 20% of gdp and I believe that the Asian Tigers got ahead by relying on trade, comparative advantage and a market economy, not government led growth. Furthermore “mature” economies with heavy redistribution tend to have only modest growth. I would submit that government spending beyond a basic level acts as drain that only already prosperous countries can absorb. Western Europe is the best example of high government spending and they have been in relative decline for decades. Furthermore, Europe is now collapsing under the weight of its excessive sovereign debt.
Isn’t “welfare” also a synonym for “charity”? Frankly, it doesn’t seem like a bad thing to me.
But the foundation of the system created by the Soviet Union was unsustainable, IMO, which is the primary cause of its collapse.
First, Spencer already pointed out the flaw in the argument you just tried to use. When government was as small as you’d prefer growth was in fact lower than after it began to grow after World War II. Businesses in mature industries also only have moderate growth. When they try to move beyond that growth because of Wall Street pressure they often destroy the business. Not a good model to follow. And you obviously do not understand everything that is contributing to the problems in Europe. It is the combination of sovereign debt, the ongoing jobs recession and the common currency without common financial policies.
1. I am trying to look at relative growth in prosperity. Spencer claims that no contry has ever used a market economy and small government to surge ahead of the rest. I am saying that I think this is exactly the recipe used by the US to surge ahead of Europe prior to WWII. If growth rates are higher after WWII that could be the result of greater work force participation (women) or a broader skill set among workers. (GI bill would support Spencer, but it could also be natural result of the accumulation of wealth in a society.) That is why I invited the comparison between releatively market oriented US and relatively government heavy Eupope.
2. I am not just talking about mature industries. I am talking about mature economies. Mature economies can still innovate and establish new industries with high potential for growth. I believe that innovation has been severly stiffled by excessive government burden, but the major innovations that have taken place have been largely in the US. For all the contempt people have for pharma companies, there has been progress in treating AIDS for example.
3. You are sure quick to assume what I “obviously do not understand.” Sure there are other elements that precipitated the sovereign debt crisis, but that’s what it is. Governments can’t pay back their loans. The most reasonable assumption would be that they borrowed too much. And it’s pretty hard to argue that Europeans are undertaxed, except in Greece where the government is both corupt and profilgate.
“Government services are “normal goods” — as people get more prosperous, they want more of them. Giving people what they want is not a bad thing.”
No, just no.
A normal good is one where spending on that good goes up in proportion to the rise in income. So, when we’re a poor nation we spend 20% of GDP on government and then when we’re a rich nation we also spend 20% of that higher GDP on government.
Which isn’t the argument you’re making at all. What you are arguing is that as we get richer we desire to spend a greater portion of our incomes on government. That is, that government is a luxury good, we as a rich nation want to spend 40% of GDP on government, not the old 20%.
And as I’ve muttered about before, it’s very important to unpick what is in there in “government” before we all say that we want more of it.
Now it’s certainly true that both health care and education are luxury goods. And that in most of the world (yes, even the US,) these two are largely (yes, US govt spending on health care approaches the %ge of GDP of total health care spending in some other rich countries) financed through government.
That does not mean that as GDP rises we want more government. It means that as GDP rises we want more health care and education, things which happen to be financed through government even though they don’t have to be. Sure, maybe that is the best way to do it, maybe it isn’t: my point is that you’ve not identified a desire for more government, you’ve identified a desire for more health care and education.
I think I’d also add social insurance like retirement pensions, unemployment pay etc to the list of luxury goods. The UK history of Friendly Societies before the nationalisation of pensions and unemplouyment pay certainly showed that as incomes rose those things also grew faster than the incomes.
But as I say, that we can identify luxury goods that happen to be provided through government is not the same as saying that government itself is a luxury good.
Heart–Actually, in theory there is no reason for a country ever to pay back its sovreign debt. All that’s needed is the ability to pay the interest on the debt. If no one calls in his bonds, then there is no problem. The European countries in trouble have very modest debt loads. But because of their economic downturn cannot instantly cough up all the money they owe.
So, what is to be gained by demanding payment and refusing to renegotiate terms? My point is that the way to manage economies is long term and in good faith. Certainly, there are vultures just waiting to swoop in and eat up every asset of value in every affected country. First thing you know, Goldman will own Greece, the Alhambra, and the Vatican. As Margaret Thatcher said, don’t go all wobbly and you’ll be alright. People need to recognize a domestic and European version of “Shock and Awe” when they see it. NancyO
Tim–What do you mean “government” exactly? Is it a bad thing to hire more, better trained and therefore more expensive teachers? If health care is a luxury, then I suppose you’d say that fresh, safe water is too. Want to give that up for the sake of “freedom”? Take another tack and I might see the value in your argument. NancyO
jazzbumpa: “Using a different word doesn’t make redistribution other than what it is. It seems that capitalism is a highly effective engine for pumping prosperity into the hands of a rather small elite. (Corporatism does it on steroids.)”
The problem is not redistribution, it is distribution. Redistribution implies that something is taken from someone who has a right to it and given to someone who does not have a right to it. If you do not believe that, then don’t use the word.
“–Actually, in theory there is no reason for a country ever to pay back its sovreign debt. All that’s needed is the ability to pay the interest on the debt. If no one calls in his bonds, then there is no problem. The European countries in trouble have very modest debt loads. But because of their economic downturn cannot instantly cough up all the money they owe.”
More fundamental to what we see right now is that the countries who see their yields skyrocket are not those with particular debt levels or budget deficits but those that are in teh Euro straitjacket and so can’t print their own money and have no effective lender of last resort-technically the ECB could do this but the choose not to.
Sure a country could maintain a modest debt and constantly roll it over. But it is unstainable to insist on borrowing more and more each year at a faster rate than the economy is growing. You do realize that the “vultures” are the ones who have actually put up their own money in order to finance government debt? They are getting nervous because it is becomming obvious that Europe is not serious about repaying them. To say that those countries were fine so long as there was never a economic downturn is hardly reassuring. My health savings account is overfunded, so long as I never get sick or hurt.
By what standard are European debt levels “very modest?” Can they afford to pay them back? – No. Can they find anyone willing to lend them more money at that interest rate? – No. Can they covince their Central Bank to print more money and hand it over to them? – No. Instead they are looking to the US to avoid a meltdown.
If printing money were such a great idea, why bother borrowing in the first place? Why not just print all the extra money you want to spend?
Nancy: Luxury good is a technical term. It does not mean “ooooh, that’s a luxury!” like Belgian chocolates.
We have three types of goods, inferior, normal and luxury.
An inferoir good is one where as our income rises we spend a smaller portion of our income on that good. A normal good is one where as our income rises we spend the same portion of our income on that good. A luxury good is one where as our income rises we spend a greater percentage of that higher income on that good.
Certain foods are inferior goods: potatoes say. As our income rises we actually eat fewer potatoes and more of other things, as well as just spending a smaller percentage of our total income on foods.
Housing is perhaps a normal good: richer people tend to spend about the same amount of their income on housing as poorer people, they just live in bigger and more expensive houses. Health care is a luxury good. As we get richer we tend to spend a rising percentage of our income on it.
Sorry, but barbs like this “If health care is a luxury, then I suppose you’d say that fresh, safe water is too. Want to give that up for the sake of “freedom”?” don’t actually work if you’ve no idea at all about what is being discussed.
Heart: “Western Europe is the best example of high government spending and they have been in relative decline for decades.”
False meme. They’ve actually been growing at the same rate as the U.S. for decades:
(I need to update those tables to include recent years.)
The argument you *should* be making: they still haven’t caught up! Why?
*That* is a great question. Some thoughts:
I hear this all the time, and I don’t think the argument has any legs.
The Soviet Union didn’t collapse because it engaged in redistribution. It collapsed because government owned the means of production.
Socialism, Capitalism, whatever, choose your words and definitions. But I think that is the key distinction.
Tim: Thank you! Yes. I should say “luxury good.” Though I sure would prefer a less value-laden term for goods bought in larger proportions at higher income/wealth levels. Something like “normal good” that imparts to readers its own technical, non-judgmental nature.
But whatever you call those goods, proposition #1 says that people want them, and that’s why countries end up providing them via government. The presumption underlying that proposition is that private players don’t/won’t provide them.
I’m thinking you already understand: I’m not saying that’s correct, only that it’s one of the logical possibilities.
“it’s very important to unpick what is in there in “government” before we all say that we want more of it.“
Also yes. The fact we should start with: Federal *consumption* spending/GDP has been basically flat since the 70s.
That includes education spending.
The big increases in the government budget have indeed been on health insurance and economic (social) security — basically, financial services.
Which raises the question I ask myself a lot (in response to the standard Soviet Union argument): are financial services a means of production? I don’t think they are, so I don’t see the big threat to society’freedom/etc. of their being operated by government.
“Redistribution implies that something is taken from someone who has a right to it and given to someone who does not have a right to it.”
There’s not doubt it has that connotation. What’s a better word for it?
Related, I much prefer to talk about a social support platform (or springboard) as opposed to a “safety net.” It speaks to opportunity, rather than failure.
welfare is a government program that transfers money from one person to another person. this has always led to the people who have money arguing that the people who don’t have money should work harder and live on less and submit to degrading examinations to make sure they are not hiding their assets.
charity is not a government program, but it has never been enough to prevent poverty. SS has prevented poverty among the elderly… by the very clever idea of requiring them to save their own money, and protecting that money from inflation and market losses.
Heart, *exactly right!*
We’re still operating our monetary system as if we were on the gold standard, with the whole weird treasury/fed shadow dance around bond issuance and open market operations.
Why print treasury bills (and pay interest [mostly] to bankers on a risk-free asset) when you can just print interest-free dollar bills? (In both case, electronically.)
More tk on that whole question…
maybe NO word for it. we can use “redistribution” when we can’t think of anything better. sometimes “welfare” is what is needed. but SS is not welfare. the only “redistribution” is from your young self to your old self.
meanwhile all the good government programs that keep the rich from gathering everything to themselves and choking the economy do not have to be seen as “redistributive,” but merely as ways to put money to work making this a better country… a country that benefits the rich as well as the poor.
that’s why i hate to see obvious “tax the rich” schemes and rhetoric. the rich need to pay their share, and it is not good that they acquire too much, but there is no need to play Robin Hood to get a balanced economy.
and yes, we need better “springboards” but we will always need some kind of safety net.
I agree entirely. just wanted to make the point that you can get growth without “business,” and especially that business won’t get you growth without sane government.
you may be right. but the Soviet system may have collapsed just because it started in tyranny and never found a way to treat its citizens like human beings. that is not a property of “socialism”, but it might be the case that “free markets” tends to limit the evil that men do to one another… except that free markets need government to limit the evil that men do to one another when unfettered free markets allow them to get away with it.
there may also be some truth to the idea that the Soviet Union was unable to provide that decency, not to say incentive, to its own people because it was always at war… not by its own choice.
it wasn’t the Reagan arms build up that drove the Soviets to bankruptcy, but the cold war, started with Truman, probably did.
perhaps the way we are doing to ourselves now with the unending war on terror.
babies grow faster than grownups. think about it.
as you say below “luxury goods” is a technical term
too bad it has connotations that instantly turn the conversation, not to say the internal thoughts, to nonsense.
as for the 20% of the economy for government being “right” whatever the size of the economy. that is what i call percent paresis. what is right is what is the best, or only, way to buy what we need. we may have done fine when what we needed was groceries and a house and car. when we start to need clean water, roads, an army, we may start to need some of those “luxury goods” that can only be reasonbly provided by government spending.
and when we talk about Social Security as “government spending” we are just being lazy with words to the point of stupidity. Social Security is you saving your own money. all the government does is manage the savings, protecting it from inflation and market losses by pay as you go financing, something only a government can do.
because in the real world there are gradations. it is not either-or the way it is in the comic books.
I will defer to you on US v. European growth. The US economy is carrying the burden of enormous military spending and poor policy in many areas, notably health care. It is easy to believe this offsets any growth advantage from leaner government services. In any case, something must account for the US’s ability to fund an expensive military and maintain it’s economic preeminence. Personally I believe that the entire Developed world is under performing. The possibility of surging ahead is ripe for the taking, but no one has the political stomach to make the short term sacrifices necessary.
I think the Asian Tigers have had historically low government spending, but I don’t have any ready data to back that up. Again I think it is best to look at countries that are becoming rich rather than those that already are.
“Reduce all wages and prices by 10 percent, and nothing real should change (ignoring an increase in the ratio of outstanding money to the price level)”
Yeah but in considering that, you have to consider the convergence/catch-up effect. Simply because they’re way behind in many ways. and those ways are importable, they’ll tend to catch up.
“I think it is best to look at countries that are becoming rich rather than those that already are.”
Yeah but in considering that, you have to consider the convergence/catch-up effect. Simply because they’re way behind in many ways, and those ways are importable, they’ll tend to catch up.
“An inferoir good is one where as our income rises we spend a smaller portion of our income on that good”
i guess that makes food an inferior good.
“i guess that makes food an inferior good.”
Yep. As with “luxury good,” I wish we had a technical term that wasn’t value laden.
The obsession of Americans with the size of government is bizarre and more than a little nuts. It’s not how big it is that matters, it’s how well one uses it that matters.
Worrying about the size of government is like trying to say what is the optimal size of an automobile. There is no optimal size. It all depends on how big a family one has and how many folk need to be in the car at the same time. A two- person Smart car is too big for a family of six. An SUV is dumb when used by only one person.
Thus, the correct questions to ask would be: “What do we wish to accomplish, what is our goal.” The next question should be” “How do we get there?”
Obviously there are many things only governments can do. So if you want a lot of those things, you have to have a “large” government.
(1) Obviously governments or other non-profit mindless bureaucracies should do things that are mindless and bureaucratic. I.e., plain vanilla banks should be owned and managed as government or non-profit bureaucracies. As the last three recessions have proved, the last thing one wants is “imaginative,” “creative” bankers. On the other hand, things that require egotism and imagination should be done by entrepreneurs. I.e., investment banking. If they win, they should win. If they lose they should lose all their own money. No government bailouts ever. The dumbest thing our government ever did is abolishing the Glass-Steagal barrier between the two kinds of banking.
(2) Governments MUST step in and own everything not owned by individuals. Here, at little history is helpful. Under Roman law everything was required to have an owner or proprietor. The owner could, if he wished, rent out all or part of his stuff to a possessor. Ownership was absolute and defined as the right to use and to abuse. I.e., if one can’t freely destroy something whenever one feels like it, one does not own it; one may have possession, but one does not have ownership. In the case of a house with a mortgage, the bank owns it and allows the residents to possess the house by living there.
Roman law also held that when something does not have an owner, then the government owns it. Because it is impossible for anyone other than the State to maintain and improve unowned property. For example, fish in the oceans. No one has an incentive to limit his catch because he knows that if he does, others will not limit their catches. So everyone takes the maximum possible. Soon the fish are extinct. So in a case like that there is no alternative to having a government that is bigger and stronger than all the fishing companies on earth so that it can regulate the amount of fish taken every year. How big should government be? Big enough to do the job. But no bigger.
One can think of many such cases–food and drug regulations, environmental protection, policing of the public highways. For example, energy companies are heavily subsidized, since the government does not require them to price their product so as to include the total cost of producing electricity. Again, one wants a government stronger than all the corporations on earth. So that it is powerful enough to enforce a pollution and carbon tax on electricity companies burning coal and an environmental and disposal tax on those using nuclear power plants.
(3) Sometimes, one might want a mix of government and private. The best medical care in the world would probably include both. Medicare, Part E (for Everyone) would guarantee every American adequate care–i.e; all the care dictated by best-practice medicine. (In a sense, one can compare this kind of medicine to plain vanilla banking.)
But physicians are not fungible; some are much better at curing difficult or rare cases than are others. The […]
“But whatever you call those goods, proposition #1 says that people want them, and that’s why countries end up providing them via government.”
That’s the bit I’m trying to tease out. I agree, they’re luxury goods, I agree that government supplies them and that this is (part at least) of the increase in government as a portion of GDP.
I also agree that politicians promise to provide them because the voters want those luxury goods.
However, I’m not entirely convinced that government provision is actually the best method of provision of (all) luxury goods. Take, for example, health care. No, I’m not a fan of the US system, don’t worry. But nor am I a fan of the UK one (direct government provision of care as well as financing of it).
A little side step here……I make, often, the archaic distinction between insurance and assurance. Insurance is the pooling of risks, unlikely ones, ones where if the event happens we really have no individual capability to deal with it. House fire insurance, hurricane perhaps. Assurance is the saving (quite possibly tax privileged) for something that is likely to almost certain to happen. There’s no pooling of risk here, or not to any great extent. Take, as an extreme, burial insurance. Unless you’re lost at sea someone, somewhere, is going to have to pay for your funeral so it’s not in fact insurance, it’s assurance.
I’ve no problem at all with the idea that certain forms of insurance are best provided through government. I might want to argue each case (govt underpricing of flood insurance has led to waaaay too much building on flood plains for example) but the principle is sound. I’d also argue that almost all forms of assurance are not best provided by government (although entirely open to the idea that certain forms should be tax privileged).
So, back to health care. There’s a part of what is currently called health care insurance which really is insurance. Against some dreadful cancer or something. Getting it would bankrupt any one. It’s also not something that happens to all so risk pooling can be done.
However, current “health insurance” also covers an awful lot of health assurance. Routine shots, vaccines, check ups and so on.
I wouild be (along with Brad DeLong for example) entirely happy with government run health insurance with us all having to provide the assurance part ourselves. DeLong’s suggestion was we all save, pay for ourselves, whatever, for routine health care. As soon as health care goes over 10% of annual income then the government pays for it. We deal with the assurance part, govt with the insurance part.
Strangely, this is actually how the Singapore system works. Personal medical savings accounts for routine stuff (ie, tax privileged assurance) with govt insurance for big ticket items. This provides health care as good as it is anywhere e4lse in the world at a fraction of the total cost.
DeLong (without using my insurance/assurance terminology) also advocates setting up Social Security the same way. Pretty much all of us are going to reach 65 so calling it insurance any more is silly, It’s assurance. We ought to return the system to what it was, insurance against living longer than your savings. That means, very simply, raising the qualifying age to average age of death.
Now, I’m not trying to convince you of the merits of these specific proposals. However, I am trying to convince you of the merit of thinking about insurance and assurance in therse terms.
I have no doubt at all that there are certain forms of insurance which only government can provide and which should be righteously so provioded. I am deeply unsure that any forms of assurance should be. And I fid the distinction between the two […]
Tim, good thinking. Non-systematic thoughts:
In health insurance, you’re basically distinguishing between low-deductible and high-deductible/catastrophic coverage, right?
If we really believe consumer choice will control costs, we should make low-deductible coverage illegal (whoever provides the coverage). Its very existence pollutes the price/shopping system, and in our current system employers feel strong pressure to provide it to get top workers. But of course government not providing/mandating it would of itself reduce its prevalence.
But given the information/timing difficulties of “shopping” for health care, I tend to question how much individual choice will bend the curve. (I had to get my first colonoscopy recently, the prospect of shopping was just overwhelming, just went to my doctor’s reccommeded provider, paid the bill which was negotiated down by my insurer but I wasn’t past my high deductible. Stupid? Yeah. Me and most other people…)
Also incentivizing regular preventive care is said to to greatly reduce aggregate costs. (But I wonder: does it just delay the big costs for each individual, while raising them in aggregate because everybody hits end-of-life eventually? Haven’t wrapped my brain around the arithmetic of this key issue.)
How to reduce the cost of healt *insurance* as opposed to care by encouraging individual shopping: let independents (i.e. ME!) write off their insurance premiums the way businesses do for their employees. Current system incentivizes employer-based insurance, which is the stupidest setup imagineable. You get sick, lost your job, lose your health insurance. Crazy.
Also the problem with the SS proposal. Lots of people will be, are, stupid. Do we let them eat cat food? Free-marketers often accuse bleeding hearts like me of ignoring the realities of human behavior/motivation, but I think the opposite is at least equally true.
Stopping now, gotta run…