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Old 08-08-2012, 11:50 PM   #1
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Default What is big government?

Interesting stuff from Scott Sumner. I disagree with the validity of a few of his examples, but in general I think he's pointing out some some good stuff about what assumptions we make when we discuss small vs. big government (or right vs. left, or conservative vs. liberal, or Democrat vs. Republican, etc.).

I think he's being somewhat naive when he concludes that at least part of the real problem isn't big government, but then Sumner is much further to the left politically than I am. Still, I'll admit he's spot on in some of his critiques of the political right, even if I disagree with the conclusion.

What is big government?

Tim Worstall is looking for people to support a project that will try to explain the success of the Nordic economies:

We’re generally told from the right of the political aisle that such societies cannot work. Taxes will be so high that all initiative, all economic growth, will be snuffed out. This clearly isn’t true as they’re rather nice places to live and they have perfectly standard, if not better than many other European countries, economic growth.

But it’s also true that they violate some of the canons of the left side of the political aisle. Capital and corporation taxes are low for example. Sweden doesn’t even have an inheritance tax. The basic national income tax rate in Denmark is 3.76%, the top one 15%. The tax systems of all four countries (Denmark, Sweden, Norway and Finland) are more regressive than the tax systems of either the US or UK. Yes, top rates of income tax are higher: but they raise a great deal more money in heavily regressive and high rates of VAT.

There is no national minimum wage in any of the EU Nordics. Taxation for social spending tends to be bottom up rather than top down. In Denmark, as an example, the social security taxation is set by the commune, a grouping of as few as 10,000 people. The rate might be 25 – 30% added to that national income tax noted above. This is collected and spent locally. Sure, communes will group together to set up services a single commune would not need: specialist hospitals for example. But money and decisions are local, only moving to a higher level when necessary.

In the American sense this would be like running say, Medicaid from the county level upwards rather than as it does work, from the Federal Government downwards.
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This got me thinking about the term ‘big government,’ which is also the cover story from last week’s Economist. An obvious starting point is government spending as a share of GDP. But even a moment’s thought shows that won’t work. Imagine the government told every citizen to pay a lump sum tax of $50,000, but also provided a lump sum welfare payment of $50,000. In that case total government spending would soar to over 100% of GDP, and yet nothing “real” would have changed. Obviously this doesn’t occur in the real world. But I’ve read that much of the Nordic welfare state consists of taxes levied on the middle class, and then returned to the middle class in various social programs. So this led me to the following ideas:

1. Government output matters more than government transfers.

2. Transfers matter more if they have strings attached (food stamps, Medicaid, housing vouchers) as opposed to no strings attached (Social Security.)

3. Transfers matter more of they raise the MTR on working or saving.

4. Transfers matter more if they redistribute income from the rich to the poor.

A utilitarian like me views the redistribution from the rich to the poor as a good thing, and the effects of high MTRs as a bad thing. The US tax system is unusually inefficient, because our income taxes are riddled with loopholes. Thus our top MTR (43.4% next year, roughly 50% including S&L income taxes) is similar to top income tax rates in Europe, and doesn’t raise very much revenue as a share of GDP. In contrast, a conservative with a “just deserts” approach to fairness might have a negative view of both high MTRs and redistribution.

Government output is also a tricky concept. Does it really matter if Singapore Airline is owned by the government, if it receives no subsidy and is not protected from competition? Here’s a better example: If I’m not mistaken roughly 10% of the US and Swedish K-12 education markets are served by private schools, and the other 90% by public schools. Seems similar, doesn’t it? And yet in America the government schools are almost all local monopolies, whereas Sweden has a 100% universal voucher system allowing students to attend any school they wish. Thus one could argue that the role of government in the US education system is effectively much higher than in Sweden. In general, the Nordic countries are famous for privatizing many government services that are done by the public sector in the US (airports, passenger rail, air traffic control, fire prevention, etc.)

Another definition of “big government” would be exactly that, how big is it in absolute terms? The US government is presumably the world’s largest, and hence is probably less efficient than smaller governments, other things equal (and other things obviously aren’t equal.) Countries like Switzerland, Sweden and Denmark are not just smaller than the US, they are also more fiscally decentralized. So one definition of “small government” would be government that is highly decentralized. Remember the bumper sticker “S*** happens.” In America you might say “McAllen County happens.” I can’t imagine that sort of waste in a Danish or Swedish county that is spending its own funds.

Another definition might involve the number of regulations with which citizens must grapple. I’d guess that the US has more regulations than any other country in the world, but I am not certain. I do know that our tax system is extremely complex, and this is the main source of frustration that I face when dealing with government. Especially the foreign tax credit, and the credit for children’s summer camp, which are very difficult for me to do, even on Turbotax. In contrast, in Sweden the government simply sends you the bill. There are no forms to fill out. I’d much prefer the Swedish system even if tax rates were higher. On the other hand European regulations are often more important than US regulations, especially in the labor markets. So the total number of regulations may be misleading.

Is there any way of organizing all these disparate factors? Perhaps one approach would be to look at how much different people’s lives are from how they’d live under a relatively minimal libertarian state. Thus prior to 1865 a large fraction of southerners (i.e. slaves) lived very different lives from what they would have experienced had they enjoyed the right to travel freely. That’s big government. Or at least important government. And yet I’ve seen conservatives refer to early America as a sort of libertarian paradise. No wonder the left views their motives with suspicion.

Using this approach I’m not sure whether the the Nordic governments are all that big, and I’m not sure the US government is all that small. Surprisingly, the Heritage Foundation seems to agree, as they rate the US and Denmark roughly equally in terms of “economic freedom,” despite the fact that (AFAIK) Denmark’s government is the world’s largest, as a share of GDP. The Heritage ranking is especially surprising to me, as I’d imagine that that conservative institute doesn’t agree with my utilitarian approach to issues such as income redistribution, global warming and gay marriage. Thus it’s not just squishy “liberaltarians” that have serious doubts about traditional metrics of for measuring the size of government, hard core conservative are also open to the Nordic model.

This list is by no means exhaustive. In Italy you need government connections to get jobs teaching in universities. In the Nordic countries (I assume) the decisions are based more on merit. How does that affect “size of government?” The more one thinks about this issue, the less confidence one can have in our traditional measures of “big government.”

Dems like Obama need more awareness of what Bastiat called “the unseen” side effects of government policies. And the GOP needs to learn that the real problem isn’t big government, it’s ineffective government that messes up people’s lives.

PS. If Congress were to simply allow us to deduct up to $1000 in foreign taxes, and if it ended the tax deduction for summer camp and daily wear disposable contact lens, my life would be so much happier. And I could spend more time blogging.
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