No. Robert Barro is about a million times smarter than me, but I shamelessly continue to think that his thesis is unlikely.
I am stating two beliefs about the economy that are related, but can be independently judged as theories in their own right:
1) Government spending lowers output and/or growth. But at American levels, it doesn't lower it as much as most libertarians/conservatives think; if we slashed government spending in half, the economy wouldn't suddenly grow by a third. It wouldn't even suddenly grow an extra 2%. There are many, many constraints on human economic activity, and at American levels of taxation, taxes are not the largest of those constraints.
2) For any given level of spending in the current American economy, the difference between taxation finance and debt finance of said spending is not large enough to be easily distinguished from economic noise. What matters is the level of spending, not the way that this spending is financed. This would not be true if any number of conditions obtained--if we were prone to imposing punitive capital taxation, for example, or borrowed large sums of money in other currencies. But these things are not true of the current American economy.
How you finance the spending may matter if the method of financing alters the amount of spending that politicians do. But I think the jury is still out on which method of finance is the more effective constraint on government spending--and to be sure, it may turn out that here, too, there just isn't much effect one way or the other.
I think there are economic policies that matter a lot for economic growth, but the impact of fiscal policy really seems to be shockingly small, especially compared to the high hopes once held for it on both sides.
Agree with MM
do politicians really care how spending is financed?
I might care if I have to borrow, work more or dip into savings to spend, and businesses usually go through similar exercises, but the charades that Congress goes through (CBO scoring games!) is no restraint
>Government spending lowers output and/or growth.
In developed countries (i.e., the OECD), this simply *isn't true.* (Within the 25-50% of GDP range.) It's an entrenched ideological belief, with as much validity as marxist ideological beliefs.
Those who hew to this belief should look beyond the esoteric (and epistemological) models, to the empirical data:
http://trueconservative.typepad.com/trueconservative/images/2007/12/21/oecd_taxes_and_gdp_growth_scatter.jpg
>at American levels, it doesn't lower it as much
>as most libertarians/conservatives think
Based on the data, this certainly is true.
>the impact of fiscal policy really seems to
>be shockingly small, especially compared to
>the high hopes once held for it on both sides.
This is also true.
What is certainly true--if OECD countries are any example--is that a certain level of government spending is necessary for long-term prosperity. The institutions that that spending pays for are what allows that prosperity to happen.
"How you finance the spending may matter if the method of financing alters the amount of spending that politicians do. But I think the jury is still out on which method of finance is the more effective constraint on government spending--and to be sure, it may turn out that here, too, there just isn't much effect one way or the other."
I was about to agree. Republicans caught grief when the surplus vanished, true. But I don't think it compares to what happened in 1994. Democrats were voted out of both houses of congress on essentially one issue - the Clinton tax increase. I remember polls at the time showed that even a majority of people who normally voted Democratic, but switched, and whose taxes did not go up, switched because they thought they did. Tax increases produce phantom pain!
I think borrowing needs to be combined with other negative effects that can, at least for propaganda purposes, be linked to the deficit. Reagan didn't suffer politically from massive borrowing because there was growth when he needed it. Bush the elder was crucified for deficit spending because of the (un)timely recession.
You seem to be addressing the two facets of what we used to call "Crowding out." How spending is financed matters, at least in those theories, but I've always been more interested in the other side of the argument: what's being financed?
There *are* some true public goods even to this day. As inefficient as our military is with a dollar, they are still far more effective (and perhaps efficient) than any private-sector alternative you could come up with. Military spending gives the economy the security it needs to grow, and has to be viewed overall as an accelerator.
Part of my job involves determining where to place global corporate assets and, believe me, all the tax incentives in the world won't motivate me to put certain crown jewels anyplace but Europe, Japan, Australia, etc. If a government can't secure peace, the economy is going to struggle.
Ditto roads and infrastructure. One of the largest disappointments of the post-Ike years is the almost complete abandonment of road expansion or improvement in the USA. Even with the ongoing expansion of "virtualized" workers, the need to physically get to the job/meeting/conference/etc. is acute. We are choking our economy every time we ignore this.
My point is that the dollars spent along these lines represent far less than 50% of government spending in the US. Most dollars go for either straight transfer payments, or "programs."
Thos dollars do, in fact, crowd out other uses for that money that would be more effective.
Transfer payments are probably the least destructive, but they are rare. Politicians realized a long time ago that transfer payments don't give then anywhere near the opportunities for corruption and graft that programs do.
Thus we have all of those wonderful agencies, doing such a terrific job with your money. Certainly better than you'd do with it, right?
Dollars spent on our current education system, most welfare programs (not transfer payments, but "programs"), infrastructure maintenance, etc. at this point are being poured into "machines" that are horribly inefficient, corrupt, or both.
Even agencies like police and fire departments fall into this category in some areas (New Orleans, anyone?)
In toto, the dollars spent on this ocean of mediocre and corrupt agencies truly represent what amounts to legalized theft. The impact on the economy is much the same, without the burden of law and court costs. It certainly doesn't grow anything, except the power-base of the people controlling it.
"...if we slashed government spending in half, the economy wouldn't suddenly grow by a third. It wouldn't even suddenly grow an extra 2%"
Depends what we cut. To the extent that government services are a substitute for private ones like say flood insurance, I doubt we'd see much movement. But if you de-funded the regulatory apparatus, whoever controls imports and tariffs, and all the agricultural, commercial, and industrial subsidies, then you could get a greater than one for one on those.
The essential trouble here is that there are two kinds of things that make government bigger - spending and regulation. Regulations can have very little fiscal impact, but vast economic impact. Probably the best place to start for aspiring government-shrinkers is regulation. Cutting regulations will save some money by allowing for some agencies to be closed, but the benefits are much greater than that.
Of course, even that is too simplistic becase, hard as it can be to believe some days, some government programmes are actually worth having. So what you really need to do is examine each policy one by one and decide whether its benefits justify its costs, and if not cast it into the flames.
That sort of particularism is meat and drink for a professional policy wonk like me, but poison to the type of government good - government bad arguments used by politicians of all types. For what its worth, I believe a government rationalised in this way would be much smaller (both uin spending and regulation) than pretty much any Western government that exists today.
I believe a government rationalised in this way would be much smaller (both uin spending and regulation) than pretty much any Western government that exists today.
Of course to undertake such an optimization, you first will have to become a lifetime (and perhaps hereditary) absolute monarch. And then you'll have better things to do ;-) I know I would...
I think there are economic policies that matter a lot for economic growth, but the impact of fiscal policy really seems to be shockingly small, especially compared to the high hopes once held for it on both sides.-MM
It's a lost cause trying to dissuade Megan McArdle from even the silliest of her beliefs. I'll bet she didn't bother to read the Presott and Feldstein papers I linked to. Ah well.
As I explained before, her argument, in its current incarnation, amounts to the proposition that the relevant elasticities (like the elasticity of the labor supply) are close to zero. And that is a very dogmatic position that very few economists nowadays would accept. As Larry Summers--not usually considered a wild-eyed supply-sider--explained :
Noone wants to return to the 93% marginal tax rate that prevailed before Kennedy nor even the 70% rate that prevailed before Reagan. And there's a good reason for that. As Larry Summers noted, high marginal tax rates distort incentives, create large deadweight losses, and stifle growth.
Megan doesn't seem to understand that, but thankfully many of her regular readers do.
It seems to me there's a moral difference between
1. being taxed for spending that may or may not benefit you and your descendants, and which you may or may not agree with but which was determined by a government whose members were chosen in elections you could vote in; and
2. being born owing hundreds of thousands of dollars for spending that may or may not have benefited your ancestors or ultimately yourself, but which was determined by a government you never had any say in.
Not that deficit spending is inherently evil, but it seems to entail a particularly strong responsibility that the spending be for wise public investments, or that what's spent in lean years get paid back in fat ones. Also, I wonder whether there are different effects on economic behavior to being taxed on your earnings versus being born into debt. Sort of like whether it's different to be paid partially in advance for a job you've contracted to do, as opposed to being born into debt peonage.
Greg Mankiw is yet another fine economist who rejects Megan McArdle's strange thesis that the elasticity of the labor supply is virtually zero. Here he quotes Gruber and Saez approvingly:
Again, the main point is that high marginal tax rates on income cause significant distortions and hinder growth... I doubt Megan will respond to this. But perhaps some of her more thoughtful readers will.
I believe a government rationalised in this way would be much smaller (both uin spending and regulation) than pretty much any Western government that exists today.
JWK, What criteria would you use for each rationalisation decision?
Could you tell whether the people doing the rationalising were actually following those criteria, or give them an incentive for doing so?
Do these studies quantify the human cost? I suspect most if not all government employment is the equivalent of a below-the-line cost of doing business.
Does / can government generate any above-the-line return? I'm reminded that the communists often had centrally-planned production systems where the (eventual) outputs were valued less than the inputs given imperfect plans and the lack of price signals to correct - to say nothing of their industrial dependence on the rotation of as much of a quarter of the population through the gulags - working for nothing.
If that labor was in the private sector, some significant fraction would be generating above the line return. What I find surprising is how large the government direct and contracted payroll is relative to the overall budget (my sense is it is more than 30% pay and benefits, esp. when pensions and retirement benefits are included). Which makes it very hard to shrink government as shrinking nearly always means job cuts and constituents complaints leading to political backlash.
I don't think any of these studies measure the impact on productivity (either increasing above the line returns or shrinking below the line costs) of an intellect in government service v. private enterprise. Can we find any examples of private sector innovation visible in government service? An analog for the private sector's measurment of productivity? Something that creates an increasing amount of good with a decreasing amount of input?
Does / can government generate any above-the-line return? I'm reminded that the communists
Ari, is there anything that doesn't remind you of Communists?
:-)
re: recalling communism (to each according to their need, from each according to whatever the rulers can beat out of them..)
I see it as a continuum, less about ideology than experimental observation. Not clear we can agree on the axis or units (or even a definition of goodness). My definition of goodness includes another 5 pain-free years of living (from maximal medical progress driven by price signals, not government intervention), a few million more citizens surviving Yellowstone cooking off (because some (large) part of humanity is maximally innovative, perhaps insuring that some growing fraction of us have the equivalent of a nuclear-reactor in our pocket (i.e. all the energy it takes to beat nature into submission), and some millions of us survive when the asteroid with our name on it comes calling (another form of being able to harvest the energy of a sun-in-each-and-every-one-of-our-pockets). Every system (and set of policies) makes compromises trading our survival for fairness/justice/… As I passed 50 and began contemplating my mortality I started to regret “containment” (wrt 5 more years of pain free life). I can imagine being saved (as a person, country or species) by any number of those wasted lives under fascism (from the holocaust to 100 million untimely deaths, or the billions of lives wasted producing products per plan, v. being maximally employed by the random walk of a market w/ no nanny-state saying “don’t worry, we’ll take care of ‘it’ so you don’t have to work so hard, respond to price-signals so quickly, …")
Seems there are three major systems for allocating resources for some goal (occasionally "the greatest common good,” or some definition of fairness, sometimes the immeasurable "social justice").
(1) parents, pastor, king, dictator decides. Usually one or more parties to the transaction are unhappy.
(2) majority or some approximation of same decides (democracy w/ varing levels of protection for minorities, and or sand-in-the-gears). Usually one or more parties to the transaction are unhappy.
(3) two entities acting in their own self interest decide (free markets with free actors with property rights and rights in their property along some continuum). Both directly engaged parties are happy. Some observer may be unhappy. Social justice tends to vest some rights with an observer.
They all seem to work some of the time, in some areas, at some scale. The first two tend to deny they are as "faith-based" as the third, and denigrate it, rather than acknowledging it's often the best, most moral (respecting of free will) mechanism. They sit on a left-to-right continuum on the axis I use (that is anchored with communism/fascism at one end, where there’s no distance between the individual and the state w/ a minimum of free will) and civil society at the other extreme (note civil society is orthogonal to the notion of rule-of-law.. the bad parts of Washington DC and Baltimore have little civil society and an excess of laws – call it necessary but not sufficient).
I've not seen any examples of nationalizing business that work long-term (those that appear to work tend to be protected from competition so there's little to compare and instead rely on one of the "faiths" for "must be right" - and I suspect that these studies (original posting) do not look closely at the average output of a worker in government service v. the private sector. I do think government jobs are best compared to an assumed before and after nationalizing of a private sector business (where federal jobs are a worst case example, esp. given the opportunity to leave these jobs with the states, and/or contract them back to the states, and allow people to vote w/ their feet to reward competition between the states for their own productivity and efficiencies) for whatever services are deemed better provided by government than by civil society or not at all. Note that since most federal government employment is services, and most services are automatable into "just software," if every state replicated the federal services (granted they couldn’t just copy the software because federal IT systems are just horrible) then we wouldn't be so vulnerable to decapitation of a few states or the federal bureaucracy.
Note I do believe there are some jobs best done, only done by those elected, or under the direct supervision of those elected (justice system is high on the list, but not much else).
I do like Maurice McTigue's formulation of the problem and opportunity to do better, where it's clear even if we disagree on what jobs a government should do, we'd like every dollar spent to contribute to the outcome we want (trouble here is we won’t agree on outcomes). i.e. don’t measure food-stamps handed out, measure hunger, deal with the life-style choices that create an environment where people will go hungry, etc. I was intrigued to find out recently that one day’s labor at minimum wage will feed a (poor) immigrant from a 2nd or 3rd world country for a month (as well or better nutrition than they had in the home country). Would be two months save for government price supports. Which is really where the notion of social justice falls apart. All these efforts at helping that interfere with the market just hold down the least of us, either in direct losses or greasing the rungs on the ladder.
See: http://www.uccs.edu/~csgi/mctigue2004august.shtml
Also makes me a fan of Masonomics.. “lose the we.”
"All these efforts, at helping, that interfere with the market, just hold down the least of us, either in direct losses, or greasing the rungs on the ladder." -AT
X2
Rwe,
Thanks for your comments. I hope Megan does engage you on this.
brooksfoe - Re: It seems to me there's a moral difference between
1. being taxed for spending that may or may not benefit you and your descendants, and which you may or may not agree with but which was determined by a government whose members were chosen in elections you could vote in; and
2. being born owing hundreds of thousands of dollars for spending that may or may not have benefited your ancestors or ultimately yourself, but which was determined by a government you never had any say in.
I don't think there is a very large moral difference between those two alternatives. In both cases a cost is imposed on you without your consent, and that cost may or may not result in a net benefit to you. The only difference is that you didn't get a vote in the decision in the 2nd case, but 1 - Your vote is almost never decisive, the result would in almost every election be the same as if you didn't vote, and 2 - In the first case you don't necessarily get to vote. You might be ineligible to vote but still earn an income which gets taxed.