Thursday, September 22, 2011

Book Review: Growing Public

Book review of Lindert's Growing Public

Read this book, my copy will shortly be on its was back to Washington state to be available for another interlibrary loan (I'll probably be buying a copy to keep as a reference soon as well).  This is one of the better books I've read on comparative policy history.  There are two volumes, the first is accessible to the general public but still contains a wealth of data, the second contains his model and a great deal of information on the data and calculations.  The second volume is aimed at social scientists but is worth reading for anyone puzzled over why his findings seem at odds with reports of what is supposedly expert opinion found so frequently on the internet.

Lindert's basic puzzle is why the relation between social spending and economic growth is close to zero, and according to his empirical estimates possibly slightly positive.  His answer is basically common sense, democracy serves as a check on any excesses so greater public spending tends towards both more efficient taxation and more efficient social policies (with some exceptions I'll mention briefly later).

The general gist of what he is communicating are summed up in 9 conclusions from page 20 of volume 1:
1. There was so little social spending of any kind before the twentieth century because political voice was so restricted.
2. The central role of political voice is shown by an exceptional early case.  Both Britain's relatively high poor relief in 1782 - 1834 and cutbacks in 1834 and 1870 fit the changing self-interest of those with voice.
3.Just noting the interests of those with voice helps explain education puzzles (summarized).
4. The great advance of social spending since 1880 is explained partly by the same political-voice motif, partly by population aging, and partly by income growth...
5. Postwar welfare states developed more fully in countries where the middle and bottom ranks traded places more and were ethnically homogenous
6. The same forces that explain the growth of social spending until the 1990s carry implications for the future of all regions... (greatly summarized)
7.The net national costs of social transfers, and the taxes that finance them, are essentially zero.*
8. That large social programs have cost little in practice is consistent with the rise of European unemployment since 1970... the loss in output was less severe because those who remained out of work tended to be less productive workers anyway.** (summarized quite a bit)
9. Two general principles seem to explain why the welfare state does no net damage to GDP per capita and why welfare states will not collapse.  The first is that high budget democracies show more care in choosing the design of taxes and transfers so as to avoid compromising growth.  The second is that broad universalism in taxes and entitlements fosters growth better than the low-budget countries' preference for strict means testing and complicated tax compromises.

I can't emphasize enough how important this book is to read if you want to understand growth, spending, and optimal policy.  There are bits I could quibble with, and I found other criticisms of small pieces online, but this is inevitable with any book of this scope.  I certainly couldn't find anything that presented a challenge to the conclusions, some of the things I would quibble with would actually reinforce them.

A significant part of this book is that there are tradeoffs on both the tax and spending side.  Neither the optimal tax utopia of the far right nor the high spending utopia of socialism are compatible with either side's preferences on the tax or spending side.  The far right can't get their optimal taxes without high social spending and the far left can't get their high spending without efficient taxes that allow capital to flow freely.  This book just reinforces my conviction that both poles are dead wrong and the state is essentially symbiotic with markets rather than opposed, efficient taxation is not possible without efficient social policy.  Also, it reinforces the idea that many social policies actually are efficient, while it is possible to simply state that the government never does anything useful the empirical data says the opposite.

This isn't to say that Lindert finds all welfare state policies effective.  For instance, he finds that employee protection laws are correlated with both higher unemployment and lower growth.  This isn't surprising but it needs to be mentioned that other works on the subject find that social spending is heavily correlated with the socialist influence that leads to these confrontational policy with business.  It's perfectly consistent with my contention that the standard left-right ideological paradigm fails to grapple with the actual observed effects of policy.

Something I would find interesting is an extension of part of the books argument to look at why US spending and taxing are so inefficient.  One notable possible cause is the very low voting turnout.  It may easily be the case that the lack of democratic participation and knowledge in the US is enabling certain elites to have undue influence in our public policy leading to both inefficient taxation that benefits these groups as well as inefficient social policy which serves to help prevent voter mobilization that would increase spending as well as targeting inefficient tax privileges.  I think this equilibrium may be particularly damaging to small business owners (and the poor), a subject I'll take up in a later post.

A working paper that addresses some of the same issues the books do is available online, though I urge you to read the entire thing to get the full argument.

* While this may seem peculiar to many that are used to hearing about the negative effect of taxation, much of what is written about taxes relies on assumptions that social spending does no good.  Using this assumption taxation can never be anything but a loss so it's basically a meaningless result as far as optimal levels of social spending and taxation go.  Though this assumption can be valid when analyzing trade-offs between various forms of taxation.

** This is something that will be uncomfortable for many to admit.  A lot of policies seek to induce more individuals to work.  However, evidence indicates that those that are dropping out of the labor market are the least productive individuals.  Is it really efficient to be trying to incentivise someone to work whose marginal labor productivity may be below the minimum wage and may even be lower than a subsistence wage?  In this case, it may be more efficient to just provide welfare rather than wasting resources on either carrots or sticks to get this theoretical marginal individual to work.  The choice in this case may be to pay for welfare or for prison.  I won't pretend to have an answer, I just want to raise the question.

No comments:

Post a Comment