« Today's Timewaster | Main | More vs Better »

August 16, 2007

Government and Markets Sitting in a Tree...

The New York Times editorial page gives in to its inner progressive today:

You would think that we were living in the lap of the Nanny State. One of the most puzzling facts of the political debate is how much traction Republicans still get from their calls to cut taxes and public spending, and how timorous Democrats are in arguing against them.

The United States has long had one of the most meager tax takes in the industrial world. America’s social spending — on programs ranging from Medicare and Social Security to food stamps — is almost the stingiest among industrial nations. Among the 30 industrialized countries grouped in the Organization for Economic Cooperation and Development, only four — Turkey, Mexico, South Korea and Ireland — spend less on social programs as a share of their economy.

Long a moral outrage, this tightfisted approach to public needs is becoming an economic handicap. Shortchanging public health impairs America’s competitiveness. If the United States is to reap the rewards of globalization, the government must provide a much more robust safety net — to ensure public support for an open economy and protect vulnerable workers.

This is sort of the point my Richardson article hinges on: More social spending can actually be a growth-accelerant. There are certain things the market can't provide efficiently, and many things the government can't provide efficiently. Only a few of those are in the overlapping part of the venn diagram. And you improve your economy -- not to mention the lives of your citizenry -- when you move goods that could be better provided by the government out of the market's grasp. In the Joseph Stiglitz talk I reference in the Richardson piece, Stiglitz said:

Yesterday, I was talking to the former Finance Minister of Sweden. And Sweden has been one of the countries that has been most successful in facing the challenges of globalization. It’s a small economy, very open, with a significant manufacturing sector. In terms of some of the rhetoric that you hear in Washington and elsewhere, it should have been a disaster case. They have one of the highest tax rates. And it’s not only true in Sweden: Finland and all the other Scandinavian also have very high tax rates. If you only looked at tax rates, you would say these countries would be a disaster. And we had a discussion in which the view was that their success was in spite of. No, it’s not only in spite of, it was because of the high tax rates.

Why is that? It sounds counterintuitive. Well, the answer is it’s how the money is spent. Again, looking at both sides of the balance sheet. It was spent in ways that led to a stronger economy, enabling the economy to face some of the challenges of globalization. The net result of this is that, for instance, Sweden and the other Scandinavian countries do much better than the United States on broader measures of success like human development indicators that look at not just GDP per capita, but also look at health and longevity in terms of labor force participation. They’re doing very well.

The government can complement and enhance the market. The Right's desire to set the two in constant opposition actually holds us back.

August 16, 2007 in Economics | Permalink

Comments

I will recommend for the first time a book that others here have recommended before: Growing Public by Peter Lindert. It's a remarkable history of the rise of social spending, and the relationship between social spending and economic growth. And the conclusion is pretty simple: the amount of social spending has pretty much zero relationship to growth; it's the allotment of the spending and the allotment of the tax burden that make all the difference. Spending lots of money badly really is bad for the economy, but there's no rule that says government has to spend the money badly.

Posted by: jhupp | Aug 16, 2007 11:12:44 AM

So you just answered my just completed question of two posts back.
Funny how this whole blog thing can work.
Good too.
thnx

Posted by: has_te | Aug 16, 2007 11:25:10 AM

....but there's no rule that says government has to spend the money badly.

I know this, and you know this, and Ezra knows this, but there's another 150 million Americans who believe it as gospel, and you can't refute a theology.

Posted by: Davis X. Machina | Aug 16, 2007 11:27:27 AM

"You would think that we were living in the lap of the Nanny State. One of the most puzzling facts of the political debate is how much traction Republicans still get from their calls to cut taxes and public spending, and how timorous Democrats are in arguing against them. "

Gee, do you think might anything to do with the fact that papers like the NYT uncritically report Republican claims about the effects of tax cuts, real and hypothetical, rather than asking economists about them?

Posted by: Ginger Yellow | Aug 16, 2007 12:02:31 PM

"....and how timorous Democrats are in arguing against them."

Maybe - on a hopeful note- we're just stuck with a bunch of democrats cowed by
the DeLay, Boehner, McConnell thug-hoodlum types.

[If you've ever seen 'cowed' on a farm you'll appreciate what it is being that..
Good Feminists be not offended, please?]

And maybe the more Jim Webb bulldog types is just the ticket.
Ain't votin' fer no more wimps. We got a longtermer called Baucus here in Montana.
And there is Tester.

One does eternally.. hope.

Posted by: has_te | Aug 16, 2007 12:28:05 PM

Provision of social benefits, particularly healthcare, by the government instead of employers can make the employers' products more competitive in the global market. That probably explains Sweden's healthy manufacturing situation.

Posted by: JackD | Aug 16, 2007 1:27:20 PM

Except that nowhere is there any evidence at all that social spending is a growth accelerant. The US has a richer and faster-growing economy than all the places that have larger social spending. The stand-out economic success story in Europe right now is Ireland, one of the four states that spends less than we do.

It may be that social spending makes people happier, or healthier, in which case their look at Sweden could make sense. But that doesn't make for a growth accelerant, or a stronger economy.

Posted by: Michael B Sullivan | Aug 16, 2007 1:32:50 PM

Michael Sullivan:

On Ireland, I'd sound a note of caution about taking GDP-type figures too seriously. I don't know if you've ever been to Ireland, but if you have, and you've also been to, say, Germany or any of the Nordics, it's very, very hard to believe that Ireland is richer in any meaningful sense of the word.

Sam.

Posted by: Sach | Aug 16, 2007 1:46:02 PM

Michael Sullivan:

On Ireland, I'd sound a note of caution about taking GDP-type figures too seriously. I don't know if you've ever been to Ireland, but if you have, and you've also been to, say, Germany or any of the Nordics, it's very, very hard to believe that Ireland is richer in any meaningful sense of the word.

Sach.

Posted by: Sach | Aug 16, 2007 1:46:08 PM

Ireland was also - I'm not sure of current status - on the receiving end of rather large amounts of EU assistance for quite a while. That's the kind of thing which doesn't show up on graphs detailing social spending as a percentage of GDP. People without a partisan axe to grind recognize that fact and understand that without it Ireland's economy would not be doing as well as it is.

Posted by: Stephen | Aug 16, 2007 2:59:00 PM

It's not just about how the state sector can help the market economy, make it that much better. Although I always foudn the view of government or the state as something separate from "the economy" rather than a full functioning part of it baffling.

Markets are fine things and when they work correctly, are an excellent means of provision of goods and distribution of information. But it's a rare case when a market system works as magically and without error as it's cheerleaders often pretend. A number of pre-requisites are neccessary for markets to function as wonderfully as they do in the models of econ 101 textbooks, pre-requisites that are seldom always met, so in many cases Adam Smith's 'invisible hand' works more like an invisible paw, who's effectiveness varies depending on how fucked that market is, free of any regulation or interference.

That's why we have regulations and rules for and against certain conduct and practices in various markets. I'm not saying that overegulation can't occur, but many times, rather than stifling the wonderful market system from reaching it's true potential, government is the only thing that is keeping some really fucked markets functioning effeiciently and relatively equitably. It's a cliche, but really the New Deal acted as more a counter revolution than as the onset of socialist misery right-wingers always pretend it was. It saved capitalism from the capitalists.

So instead of trying to convince a wall that public spending and investment and infrastructure can be a boon to the market economy, it should equally be said that if you like the market economy, you better get used to government.

Posted by: DRR | Aug 16, 2007 3:35:43 PM

DRR..that made sense.

I was reminded by your phrase
"..some really fucked markets..."

of the many 12 year old Thai girls
sold into sex slavery by impoverished parents
for use by fat viagra-driven Western corporatists
as example of --
'the market [truly] unleashed'.

Sorry-a little...egregious example.

Posted by: has_te | Aug 16, 2007 4:03:59 PM

I'm always puzzled by how the liberals shift the goalposts to try and say that other economies are doing much better than the US>

They ignore the GDP and GDP per capita and insist those are irrelevant numbers and instead use obscure metrics to try and claim that we are really ranked #159 in the world in terms of economies.

Posted by: joe blow | Aug 16, 2007 9:10:07 PM

Ireland has a population of 4.2 million and centralized wage agreements so perhaps it isn't the best country to make comparisons with. It also receive about about €35 billion from the EU between 1973 and 2003.


Posted by: donnybrook | Aug 16, 2007 10:19:49 PM

As above, GDP shouldn't really be used to measure Ireland's economy. It's one of the few where GNP provides a better picture. Still been highly impressive growth over the past few decades though.

As to copying Sweden, yes, why not? Here's a few things that they do and which could be usefully copied IMHO:

1) No national minimum wage.

2) No inheritance tax.

3) A pure voucher system for the funding of education. Any kid, any school.

4) No national health care system. Taxation is raised at the county level and spent at the county level to provide such health care. For certain of the rarer specialties counties buy upwards, to a national (or regional) provider. I believe that US counties do something similar, don't they? They all having contracts to provide care to the indigent at some local hospital?

If those who admire the Nordics would like to campaign for, oooh, any two of those four then I'll listen to them on other matters too.

One other fact about Sweden. More than 50% of the stock market is controlled by just one family (the Wallenbergs). What was that about the growing concentration of wealth again?

Posted by: Tim Worstall | Aug 17, 2007 8:34:09 AM

The comments to this entry are closed.