You always fail . . . until you succeed
By Scott Sumner
Will Wilkinson has a post on Wagner’s Law:
“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. . . .
There’s an abiding faith on the right that there must be policy levers that can be pulled to reduce political demand for government spending. The idea that it is possible to “starve the beast”–to reduce the size of government by starving the government of tax revenue–springs from this hope. But the actual effect of cutting taxes below the amount necessary to sustain current levels of government spending only underscores the unforgiving lawlikeness of Wagner’s Law. As our namesake Bill Niskanen showed, tax cuts that lead to budget shortfalls don’t lead to corresponding cuts in government spending. On the contrary, financing government spending through debt rather than taxes makes voters feel that government spending is cheaper than it really is, which makes them want even more of it.
I’m not entirely convinced by this argument. You could plausibly argue that Reagan’s tax cuts restrained spending in the 1990s, and that spending began rising again once the budget was balanced in 2000. But it’s at least a defensible argument.
It’s time to consider the possibility that there’s no convincing them. What if there’s no feasible path within the bounds of normal American democratic politics to significantly lower the level of government spending as a percentage of GDP? If we look at the world, what we see is that when people get richer, they want more welfare state. Maybe there’s nothing much we can do about that.
It’s quite possible that Will is correct, but I have two objections to this line of reasoning:
1. Goals in politics often look impossible until they succeed. I’m old enough to recall when marijuana legalization seemed like a pipe dream. Polls showed strong public opposition, and almost no country had legalized pot. Now a rapidly growing number of states are doing so. Gay marriage is a similar example. And here’s an example that is slightly closer to Wagner’s Law. How many people in the early 1960s (when the top income tax rate was about 90%)In would have expected a top rate of 28% by 1986, or even 43% today?
2. The ratio of G/GDP is an equilibrium outcome, reflecting a battle between those in favor of bigger government and smaller government. Here are a few data points showing that there is a lot of elasticity in Wagner’s Law (G represents government spending, not output, GDP (PPP) data is from the World Bank):
France: G/GDP = 56.1% . . GDP/capita (PPP) = $39,678
USA: G/GDP = 41.6% . . GDP/capita (PPP) = $55,837
Singapore: G/GDP = 17.1% . . GDP/capita (PPP) = $85,209
One might object that I am comparing apples and oranges, three very different economies on three different continents. But check out an economy right next door to France:
Switzerland: G/GDP = 33.8% . . GDP/capita (PPP) = $60,635
Another objection is that while the cross sectional data is uneven, government always grows rapidly within any given economy, as it grows over time. Perhaps, but AFAIK Singapore’s government spent about 15% of GDP back in 1970, suggesting very little growth in government during a 45-year period of dramatic economic growth. Small government in rich countries is rare, but it’s not impossible.
My point in these examples is not to show that Wagner’s Law is wrong—Will is correct that the correlation is strongly positive, merely that there is substantial variation. Think of the US ratio of 41.6% as representing an equilibrium outcome, arising from a battle between those who favor a Singapore-sized government, and people like Paul Krugman who praise the French model. Perhaps if the right had not fought for smaller government then our government would be even larger today.
Giving up on the quixotic quest to find the magic words or the magic policy lever that would finally and decisively falsify Wagner’s Law would also lead us to distinguish more clearly between the welfare state and the regulatory state, and to focus our energy on removing regulatory barriers to economic participation, innovation, and growth. We’ll see more clearly that a small government and a limited government that reliably protects rights and promotes freedom aren’t really the same thing. And we’ll begin to recognize that sowing antagonism to the welfare state hasn’t accomplished anything very constructive. The war against the welfare state hasn’t slowed growth in welfare-state spending so much as it has made our system unusually loathed and unusually shoddy. Mostly, it has fostered a divisive, racially-tinged “makers vs. takers” narrative while encouraging opposition to reform measures that might have made our safety net fairer, more efficient, and better at minimizing the economic anxieties that drive populist political sentiments fundamentally at odds with an open society of free markets, free trade, liberal migration, and peace.
Arnold Kling responded to this paragraph (and some anti-libertarian comments by Noah Smith) as follows:
1. I do not believe that either Smith or Wilkinson is sincerely trying to appeal to libertarians. . . . They are not trying to pass an ideological Turing test. Instead, they employ slurs and charges against libertarians that are popular on the left, which suggests to me that the motive is not to offer constructive suggestions to libertarians. It is not Cato and Reason that are trying to inject racial overtones into American politics. And it is not that I believe in the absolute perfection of markets-what I believe is that markets are better than government at adapting to solve problems.
2. I am not going to be bullied into supporting policies that I believe are bad just because they are popular. If you want to talk me out of my position against a policy, tell me what is good about the policy.
3. The welfare state, like any Ponzi scheme, can be quite popular as long as it is still functioning. However, some time in the next decade, I think it is probable that one of the major welfare states is going to be unable to borrow enough to meet all of its current obligations . . .
I have some sympathy for both sides. Will is right that the GOP often defends subsidies or trade barriers for their people (farmers, car dealers, Medicare recipients, etc.), while eagerly cutting benefits to “those people” (Medicaid, foods stamps, housing subsidies). And yes, I strongly suspect that race is an issue among some members of the right, especially within the GOP. Arnold is right that opposition to big government among intellectual libertarians is much more idealistic, and as far as I know is not at all racially motivated. Many go out of their way to suggest first cutting middle class subsidies.
Arnold’s right that we should not to be intimidated by the other side. I’m a strong opponent of the extreme anti-free speech elements in campus political correctness. And I’m not going to let Trump’s embarrassing lack of “reasonable” political correctness deter me from holding on to those views. I’m a strong believer that we’d be better off with a Singapore size government than a French size government, and I’m not going to be deterred by the fact that some racists in the Tea Party also talk about small government, particularly given that this recent election showed that those arguments were hollow on much of the right, a mask for a crude grab at power and dominance over “those people”.
PS. Will also suggests that we small government types might be able to make more progress with regulatory reform than shrinking government spending. I think that’s probably true. But we still need to push back against big government, especially now that we have a new president:
On the campaign trail on Tuesday, for example, Donald Trump told supporters, “We have 41 days to make possible every dream you’ve ever dreamed.” Oddly enough, it’s apparently part of Trump’s new pitch: NBC News’ Katy Tur noticed the Republican nominee make a similar comment a day later.
“You have 40 days until the election. You have 40 days to make every dream you ever dreamed for your country come true.”
Yesterday, Trump also reportedly vowed to supporters he’d “fulfill every single wish” they have for his presidency.
Not quite sure what that means, but “fulfill every single wish” doesn’t sound like austerity to me.
Here’s my dream, Mr. Trump:
HT: David Henderson, Jonah Goldberg