Monthly Archives: February 2009

Animal Spirits and Positional Ambition

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Rob Horning understands me! Please read his post on the economics and politics of “animal spirits.”

There are perplexingly many glosses “on animal spirits.” One of them is “confidence,” which is what investors faced with uncertainty about the economic climate are now lacking. Another might be “ambition.” As Chris Dillow writes in his mini review of Shiller and Akerlof’s new book:

What’s more, given that the private benefits of innovation are low, and the probabilities of success in many arts and industry small, it might be only animal spirits that give us artists and entrepreneurs. As Richard Nisbett and Less Ross wrote years ago:

We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories. 

Perhaps, then, it’s not just that animal spirits are ubiquitous – but they are necessary too.

It’s worth pointing out that it is exactly this sense of animal spirits, animated by the spirit of ambition or “emulation,” which Robert Frank and Phillip Cook declare inefficient in The Winner-Take-All Society, and argue we should tax into submission. But as Gary Becker and Kevin Murphy point out in Social Economics, echoing Nisbett and Ross, the expected payoff to entrepreneurial risk is so low that in the absence of positional competition, we would get very little of it. Entrepreneurial risk-taking is the source of innovation, which is the source of increasing productivity and wealth. So a society lacking this kind of status-seeking animal spirit might not grow at all, unless it was capable of successfully importing and deploying the innovations of more ambitiously inventive societies.

This focus on positional competition recalls the psychological microfoundations of Adam Smith and David Hume’s theories of civilization and economic growth. Their theories of motivation seem to me to do much more to illuminate the recent financial collapse than does modern macroeconomics. The myopia of financial executives making huge bets on securities graded according to algorithms that could not begin to understand was certainly driven by positional competition. The key insight of eighteenth-century political economy is that institutional rules and social norms must align ambitious, emulative, and status-seeking animal spirits to the aims of innovation, refinement, and advancement of the public good. The soaring abstraction of techno-high-finance — which decoupled investment decisions from any human sense of real economic value — encouraged the sense that the great race for astronomical bonuses was consistent with the public interest. And the sums involved discouraged the players from double-checking. It does seems that a kind of carelessness became contagious, and I don’t think it’s wrong to see “greed” as a source of Wall Street’s rather astonishing indifference to verifying the real utility of the game it was playing, though “greed” is not a very helpful diagnosis in the end. Ours was a failure of “regulation” in the broadest sense: the joint failure of institutional rules and the cultural climate to regulate the expression of positional ambition. But the lesson is not to discourage it, but to redirect it; to make it again not only safe but serviceable.

The big question is whether a risk-seeking society — which must maintain a status-seeking, ambitious culture — is or is not fated to run some of its institutions into the ground from time to time and occasionally wreak havoc on the context of trust and stable expectations that makes ordinary economic activity possible.

For those of a scholarly bent, here’s a passage from Adam Potkay’s A Passion for Happiness: Samuel Johnson and David Hume (I’ve removed the scholarly citation apparatus) on the central role of “emulation”–which is what they called positional ambition — in eighteenth-century accounts of progress.  

“An honest emulation,” rooted in a “self-love” that inspires us to think highly of ourselves in comparison with others,” is the source of all achievements, all greateness: “the philosopher’s curiousity may be inflamed by a catalogue of the works of Boyle and Bacon, as Themistocles was kept awake by the tropies of Miltiades.” Again we should recall Pope: “Envy, to which th’ ignoble mind’s a slave, / Is emulation in the learned or brave.”

The necessity of “emulation” to a beneficient progress is a, perhaps the, great theme of the Enlightenment in Britain, shared alike by Hobbes, Mandeville, and Shaftesbury, Hume and Johnson. It pervades Johnson’s Idler essays still more than his Rambler. The “renaissance of letters” that, according to standard eighteenth-century wisdom, began in fourteenth-century Italy is itself a product of emulation: “[T]he European world was rouzed from its lethargy; those arts which had been long obscurely studied in the gloom of monasteries became the general favourties of mankind; every nation vied with its neighbour for the prize of learning; the epidemical emulation spread from south to north and curiosity and translation found their way to Britain. Emulation is responsible for “elegance” of building, clothing, food; “commerce has kindle an universal emulation of wealth.”

Johnson and Hume agree that the fire that animates both the fine and practical arts “is not kindled from heaven. It only runs along the earth; is caught from one breast to another; and burns brightest, where the materials are best prepared.” The theme of emulation is omnipresent throughout Hume’s Essays and History of England–its responsibility for the enlightenment of both ancient Greece and modern Europe; the birth and refinement of all arts and sciences, mechanical arts and manufactures.

Will Coddling the Middle Class Kill Obama's Plans?

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Earlier today I was thinking about the same Lane Kenworthy post Matt Yglesias discusses here. The upshot is that if you want to reduce inequality through redistribution, tax progressivity barely helps. You need to take a huge chunk of GDP in taxes in order to finance progressive spending. The more general, sort of obvious point is that if you want to massively increase government spending, the government needs a lot more revenue. But you can take everything from the rich and you still won’t have enough. So you’ve got to massively increase taxation on the middle class. The best way to do this is through a consumption tax. But Obama keeps reinforcing, again and again, that middle-class tax rates won’t rise, as if this is itself a matter of justice. So where’s all the money going to come from to do all these amazing things? Eventually, it’s a huge increase in taxes for the middle class or nothing. This may not be a big political winner.

The progressivity of the American tax system puts big-spending progressives in a bind. They should want a consumption tax with a huge, wide base. The easiest way for government to devour ever-larger chunks of economic output is through the device of a slow series of very small rate increases on a broad base. The smaller the tax base, the more dramatically you have to hike rates in order to significantly increase revenue. But dramatically hiking rates tends to discourage political buy-in from those who must pay. Indeed, it tends to incite heated resistance. Obama did very well with the rich. But that may not last if he hits them as hard as it looks like he’s aiming to. At the very least, pushback from this very powerful bloc of voters will limit his success in raising rates at the top. Perhaps he’s cagily playing a baseline-setting game, and by announcing large increases, he’ll effectively reduce resistance to small ones, which will look good in comparison. But even the large ones leave him massively short. And government spending cannot be debt-financed forever. And he can only inflate so much of it away.

So Yglesias is right (though he doesn’t quite put it this way). Democratic strategists need to be looking at clever ways for the government to take a lot more money away from middle-class families without thereby making the GOP look golden again. Obama’s been behaving as though he’s much less fiscally constrained than he really is. But by catering to the idea that middle-class taxes shouldn’t ever go up, he’s making it even tougher on himself. Unless he’s in the middle of some kind of ten-steps-ahead rope-a-dope wherein reaffirming the middle class’ right to not pay taxes is a way of softening them up to accept huge tax increases, he may be making a mistake. 

Here’s what I initially said about Kenworthy’s post about revenues and inequality, when I was writing for Free Exchange.

Barriers to Effective Schooling

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The international evidence shows that private provision of education is often better but never worse than public provision. That there is so little private provision — not just in the U.S., but anywhere – can seem like a puzzle if you happen to think policy will tend to reflect the preferences of a benevolent technocrat. As Carney’s piece below shows, powerful entrenched interests may have a stake in making sure private provision stays crowded out. So they’ll do whatever it takes to make sure only rich people can afford to send their kids to private schools, maintaining a cartel in control of supply for the rest of the population.

Why else might private provision be so rare? Or, put another way, why might there be such a strong interest in maintaining government control over the supply of education? In a recent working paper, Harvard’s Lant Pritchett and Martina Viarengo argue that this is explained by, among other things, the desire of those with a stake in government institutions to control the socialization of children. They build a model that illustrates how the the aim of controlling socialization can help explain the pattern of resistance to private provision, even in places where it is clearly vastly superior. I find this pretty intuitively plausible. One of the first arguments against vouchers, tax credits or other systems of publicly-financed, privately-provided education is that taxpayer money should not go to schools that teach this or that allegedly malign belief. It just so happens that, on the way to making certain that children are not taught that the world is 6000 years old (which would obviously neutralize one’s ability to earn a living as a middle manager), children are also imbued with a certain nationalistic civic piety and the belief that, say, FDR saved capitalism from itself. Who knows what chaos might otherwise ensue?

The Structural Inequality Lobby

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Tim Carney’s piece on the power of the teachers’ unions and their massive push to drive a stake through the heart of Washington, DC’s modest and locally popular experiment in school vouchers should be sobering to anyone with a romantic view of democracy. 

Beltway bandits, defense contractors, influential industries—most of them pale in their influence efforts compared to the teachers unions, according to data from the Center for Responsive Politics.

Take defense contractors. Lockheed Martin, the top recipient of military contracts most years, spent more on politics than any other defense firm in the 2008 elections. They still spent less than the American Federation of Teachers, which shelled out $2.8 million in the last cycle—with nearly every AFT dime going to Democrats.

The top two teachers unions—AFT and the National Education Association—spent more combined, $5.27 million, than the top two defense contractors.

The top five lobbying firms, combined, didn’t equal the AFT and the NEA in federal contributions in the 2008 cycle. Both of the teachers unions gave more than any oil company, and the NEA and AFT combined gave more than the top four oil companies combined.

These contributions give the unions clout, and federal lobbying records show they use this clout. Again, on closer inspection, the teachers unions look an awful lot like those corporate special interests Democrats supposedly oppose.

The NEA employs four different lobbying firms in Washington, in addition to their in-house lobbying arm, which includes at least six lobbyists.  Over the past two years, the NEA spent $10.7 million on lobbying. Reviewing the filings of the NEA, the AFT, and their K Street hires reveals that lobbying to kill DC vouchers was a priority.

[...]

Again, there are substantive arguments against D.C. school vouchers. But with this money trail, it appears that congressional Democrats’ push to kill vouchers is simply a case of the piper playing the tune that the AFT has called.

If you believe, as I do, that the returns to further government spending on education, given its present structure, is zero or negative, and that the best hope for increasing the quality of education for the least well-off, and for increasing economic and social mobility generally, is to legalize competitive markets in education, then you will tend to believe, as I do, that this attempt to destroy voucher programs before than can show themselves effective is nothing less than a powerful political interest group screwing over poor people by bending the democratic process to their advantage. The sad thing, from my perspective, is that strong Democratic partisans (and especially members of the teachers’ unions) are likely to violently reject any such argument out of hand on the basis of their deep conviction that the Democratic Party cares about the poor, and so would certainly not allow itself to become captured by groups with interests diametrically opposed to interests of the poor. As time goes on, I think the relevant social science is going to brutalize the standard Democratic position, and the clash between the Democratic Party’s most powerful client and the poor will become increasingly stark. But for now, the unions will probably succeed in temporarily extinguishing the possibility of demonstrating a superior alternative to the status quo system of education.

A Rare Foray Into Political Strategy

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A couple further thoughts about Obama’s alleged incoherence. Of course, much of the economic policy stuff isn’t really incoherent. It’s just domestic Green Laternism. We will be crippled for a decade unless we muster the will to implement the full surge. The politics of this is the usual politics. If this fails, it’s because the wreckers refused to get behind it. No politician gets absolutely everything he wants, so in the case of failure there’s usually room to bring in the “close call counterfactual” FTW.

Now, Obama seems to be very boldly arguing: “If not my specific package of policies, then surely disaster!” I think this can be a bit perilous but in this case probably smart since the Republicans are so hapless. If Republicans can sabotage the thrust of the Democrats’ policies — refuse funding for your state, call for a spending freeze — and the recovery occurs anyway, then Obama’s bold conditional is decisively falsified. But voters aren’t logicians, and if we get a recovery, Obama’s going to get the credit anyway. So that tack seems like a loser for the Republicans even in the best case. (And in the worst case — everything goes further south and they get pinned with the blame — totally disastrous.) The only plausible Republican strategy is to put forward an attractive personality able to forcefully and intelligently explain in a relatively detailed way why the Dem’s plans are likely to fail, and to forcefully and intelligently articulate a plan likely to work better. That’s the only way to sow broad doubt in the wisdom of the majority’s leadership: offer an alternative that looks at least as or more credible. David Cameron is a great example of how to do this incredibly well. But as Jindal’s embarrassing performance shows, the GOP has absolutely no one capable of doing anything approaching this. So, as far as I can tell, the GOP is going to continue to get flattened, Obama will get basically whatever he wants, and if it doesn’t work, then it almost worked and who else are you going to trust?

The Incoherent Obama

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Matt Welch’s column enumerating the shameless contradictions in Obama’s speech last night is truly devastating. Welch may have the best bullshit detector in the business. That’s why his book on that inveterate bullshitter McCain was so good. And that’s why his clear-eyed take on Obama, sadly, seems so fresh. Here’s a bit, but do read the whole thing:

Obama aims to be the president of all Americans, a position that appears to be sincere. But I wonder whether in the process he might also want to consider appointing himself chief executive of his own head. All night long, with equally sonorous vigor, he served up confident assertions, only to state moments later, with equal conviction, their near opposite. 

“We will rebuild, we will recover, and the United States of America will emerge stronger than before,” Obama crowd-pleased near the beginning, in the slot normally reserved for lines like “the state of our union is strong.” Not long after, though, Americans learned that our very “survival depends on finding new sources of energy.” Also, “there will be no real recovery unless we clean up the credit crisis…our recovery will be choked off before it even begins,” and if we don’t do whatever Obama wants us to do about the banking system, “it could result in an economy that sputters along for not months or years, but perhaps a decade.” Better! Stronger! Crippled for a decade!

After detailing some clean-energy advancements in China, Germany, Japan, and Korea, the president averred, “Well, I do not accept”—there’s that self-referencing again—”a future where the jobs and industries of tomorrow take root beyond our borders.” A few paragraphs later, however, zero-sum gave way to kumbaya: “The world depends on us to have a strong economy, just as our economy depends on the strength of the world’s.” Just don’t you get strong by producing clean energy, Koreans!

It was like this all night. The president’s stimulus package “will save or create 3.5 million jobs.” One of those, anyway! His adminstration has “created a new website called recovery.gov so that every American can find out how and where their money is being spent,” unless they try to use it to find out how and where their money is being spent.

The source of Obama’s incoherence is easy enough to identify. It’s that his stated ends and the Democratic Party-pleasing means he has announced to achieve them are flatly incompatible. He’s fighting against himself.

Kill the Mortgage Deduction

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I agree with Ezra Klein in agreeing with Ed Glaeser. Here’s something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa’s extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.

The Majesty of Quasi-Royalty

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I go to IOZ for my considerable anti-political-romanticism needs:

David Brooks like totally like hates Bobby Jindal. Meanwhile Barack Obama remains Superjesus Black Reagan. He’s got good delivery. Let’s not say otherwise.

The . . . what would the Teevee call it? . . . optics were embarrassing. Congress? Men fit to be slaves, as Tiberius would’ve had it. All that leaping up to applaud. Watching adults seek to ingratiate themselves in so obsequious a manner makes me a bit queasy. What must this Roman spectacle look like to the rest of the world? The Elder Gods of the Senate may just have better quads than me, and I make yoga every goddamn day, what with all that rising and reposing. Lord above, it reminded me of High Holy Day services in my youth, except that we stood to acknowledge God and His Torah. Purim, appropriately, is right around the corner.

We will be civilized when national politics is what local politics is in my parts: relatively comptetent public administration with occasional catfights.

I was watching Unforgiven last night, one of my favorite movies. President James Garfield has just been shot and killed by that disappointed Oneidan Charles Guiteau. Gun-for-hire English Bob — the “Duke of Death,” who specializes in murdering wayward Chinese for the railroads — takes the occasion of Garfield’s demise to bait Americans at every opportunity by suggesting that they might prevent further presidenticide by rejecting their quaint notions of republican equality and just get a King–even a Queen! Hey, let’s go to the text!

ENGLISH BOB: … there’s a dignity in royalty… a majesty… that precludes the likelihood of assassination. Why, if you were to point a pistol at a King or a Queen, sir, I can assure you your hand would shake as though palsied…

BARBER: I wouldn’t point no pistol at nobody, sir.

ENGLISH BOB: A wise policy.  But if you did, I can assure you, the sight of royalty would cause you to dismiss all thoughts of bloodshed and stand… in awe. Whereas, a president… I mean, why not shoot a president?

Because it would be murder, of course. But that’s no reason for a murderer. But, these days, we’ve got the majesty of quasi-royalty. Turns out Americans long ago accepted the spirit if not the letter of English Bob’s advice–for all the good it did Kennedy and Reagan. I’m afraid that this doesn’t prove that Americans are not impressed by majesty, just that we’re prone to ideological derangement, trigger-happy, and impressed by Jody Foster even more. (God, how did I get on this riff? Please please please no one shoot the president!) 

For your further jaundiced-eye needs, here’s our nation’s preeminent imperial president skeptic, Gene Healy:

Today’s president is a constitutional monstrosity: a national talk-show host with nuclear weapons. 

And so it has been for about a century now. [ADDED: I mean, not the teevee and the nukes in particular, but you get me.] I believe the executive of the de facto constitution is a creature of technological contingency–the invention of mass media–and so may be rather inconsistent with earlier American ideals and the methods of political limitation built into the de jure constitution. The hard question is whether life under the de facto constitution has changed our ideals so much that we cannot now conceive of officially moderating the role of the “our regular programming has been preempted” executive.

Redistribution, Fairness, and Stability

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Here’s my commentary on this morning’s Marketplace. 

It’s really terribly hard saying anything in 300 words. If I’d had more space I would draw out how there is no way to succeed in promoting a unifying “we’re all in it together” mood when massive government intervention has massive redistributive consequences that track basically NO ONE’s sense of fairness or desert. That’s sure to be divisive. When Obama said in the campaign he meant to “spread the wealth around,” I’m sure most people took that to mean downward redistribution meant to rectify either the unfairness of rising inequality, the unfairness of the fact that some people are struggling for no fault of their own, or both. But bailouts of all sorts–to banks, to car companies, to underwater homeowners–spreads the wealth around in an entirely different way. “Investment” in the “green economy” spreads the wealth around. Increasing the size of the military spreads the wealth around. And so on. None of this accords with any coherent notion of fairness. And the scale of Obama’s initiatives do badly unsettle the structure around which people build expectations, and that’s an independent source of unfairness. We desperately need better framework rules for both private and public finance. It would be silly to oppose serious structural reform. But what we’re getting is the kind of half-panicked, half-opportunistic myopic intervention that breeds future half-panicked, half-opportunistic intervention. That is the opposite of what we need.

The Color of Government Money

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I’m reprinting this in full from Chris Good at the Atlantic. Someone please tell me how this is supposed to work, even in theory. And someone please tell me how speeding up the process of picking winners doesn’t simply make well-prepared regulatory capture specialists like T. Boone Pickens (whose PR blitz seems to have worked to get him into the DoE inner circle) richer simply because they’ve got the resources to hoover up contracts. 

Chu Works to Get the Green Cash Flowing

After environmentalists and mainstream politicians alike succeeded in dedicating a good chunk of President Obama’s stimulus package to green energy, Obama’s new energy secretary has been working on ways to make that happen more efficiently. Last week, Energy Secretary Steven Chu (who holds a Nobel Prize in physics) announced a slew of reforms to how the department doles out money, and a department official says more are on the way. The goal: streamlining the process so stimulus dollars can get spent sooner.

Many have posed the economic crisis as an opportunity for green revolution, and at a roundtable discussion on energy yesterday at the Newseum, the economy/energy/environment nexus was on the tip of many tongues.

“We have a plan going forward where we can reduce what could have been years down to months, and we feel very strongly that this thing will work,” Chu said of DoE spending as luminaries such as Bill Cinton, Al Gore, T. Boone Pickens, Senate Majority Leader Harry Reid, and House Speaker Nancy Pelosi listened.

Chu’s reforms include rolling appraisals of applications for loans and funding, using outside contractors to underwrite loans, more staff and resources to process applications, and simplifying application paperwork. Chu has appointed Matt Rogers, a former senior partner at consulting giant McKinsey & Company, who also worked on energy procurement reform as part of Obama’s transition team, to implement these reforms and oversee the stimulus money.

The stimulus placed $38.7 billion in the department’s hands, with heavy emphases on alternative energy, efficiency, and infrastructure modernization. DoE says it will start offering loan guarantees under stimulus provisions early this summer, and that 70 percent of the stimulus cash will be spent by the end of next year.

To hear politicians and activists talk about the timing of stimulus cash flow, “now” seems to be the only acceptable answer. A significant part of Chu’s job, so far, has been changing the way the department operates in order to make that happen.

Sachs on the Self-Defeating Stimulus

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Jeffrey Sachs’s new SciAm column titled “The Economic Need for Stable Policies, Not a Stimulus” forcefully reinforces the lesson I drew from my interviews with Prescott and Phelps. Sachs highlights:

The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated. 

President Barack Obama’s economic team is now calling for an unprecedented stimulus of large budget deficits and zero interest rates to counteract the recession.  These policies may work in the short term but they threaten to produce still greater crises within a few years.  Our recovery will be faster if short-term policies are put within a medium-term framework in which the budget credibly comes back to balance and interest rates come back to moderate sustainable levels. 

Looking back to the late 1990s, there is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. …

[...]

We need to avoid reckless short-term swings in policy.  Massive deficits and zero interest rates might temporarily perk up spending but at the risk of a collapsing currency, loss of confidence in the government and growing anxieties about the government’s ability to pay its debts. That outcome could frustrate rather than speed the recovery of private consumption and investment.

[...]

Most important, we should stop panicking. One of the reasons we got into this mess was the Fed’s exaggerated fear in 2002 and 2003 that the U.S. was following Japan into a decade of stagnation caused by deflation (falling prices). To avoid a deflation the Fed created a bubble. Now the bubble has burst, and we’ve ended up with the deflation we feared!

By the way, here’s my earlier post on “Managing Expectations Better.”

Prescott told me that he considers economic theory that treats the economy like a machine attached to policy levers that can be pulled to achieve the intended outcomes to be pseudoscience. He actually compared stimulus-mongering Keynesians to chemists before Dalton. (I gathered that Dalton is Robert Lucas.) Commenter Odograph gave me a bit of grief for quoting Prescott saying “Stimulus is not part of the  language of economics,” when of course, as Mankiw’s poll shows, 90% of economists believe you can get a growth boost by fiscally goosing the economy when resources are underutilized. I don’t know whether Prescott agrees or not (maybe not if he really thinks you can’t surprise an economy twice). But Prescott’s general point is pretty much the same as Sachs’s here: discretionary macroeconomic policy is very likely to be self-defeating and we’d do better to concentrate on setting in place a sound structure of stable rules. When I asked what he would have advised, Prescott said he wished Obama had used his considerable political capital to form some kind of task force to very deliberatively restructure the tax system, the entitlement system, the financial system, etc., instead of pushing for a stimulus. But when the President instead uses his political capital telling people to panic, you just get more of the kind of mess Sachs describes. The government under both Bush and Obama has been giving us ridiculous fool-in-the-shower macro policy, and it really needs to stop.

[HT: Tyler]

Big-Government Libertarianism vs. Limited-Government Liberalism

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I’ve really been enjoying all the terrifically smart comments in the last two posts, which have been really helpful to me. 

Maybe one way to frame my argument is that I’m not arguing for “big-government libertarianism,” but for “limited-government liberalism.” (I see that this may confuse my prior attempts to distinguish “small” and “limited,” but bear with me as I circle and recircle looking to illuminate some things that have long nagged at me.)  My sense is that most people don’t see a difference and what I’ve been doing is groping for a way to make the distinction between the two plausible and clear.

One way to think of it is to consider where you’re starting from. I am, more or less, starting from a fairly typical liberal account of the state and it’s aims. I’m then arguing that those aims are best achieved through appropriately limited government. I believe this is a principled and coherent stance that stands or falls with the background arguments about the legitimacy and desirablity of liberal democracy. If you reject the basic argument for the liberal democratic state, then you’re not going to be impressed. But if you accept the desirability of liberal democracy, you have every reason to listen.  

On the other hand, if we start from traditional minimal-state libertarianism, we’re starting with a deep suspicion of the possibility of anything more than governance of very low quality; it’s just that the anarchist alternatives (which may be feasible and worse, or just infeasible) are worse. So, to this sort of libertarian, “big-government libertarianism” sounds like one of three things: (1) A libertarianism that can’t possibly work–a hopeless oxymoron. The argument for keeping the state strictly minimal is that a more-than-minimum state cannot be kept from bloating into a rights-stomping superstate. You’ve got to choose between almost nothing or almost everything, but big-government libertarianism tries to have it both ways. No dice.  (2) A strategy for getting liberals to trust libertarians enough to listen to libertarian policy arguments. Some libertarians seem to think this is worth trying (how could we do worse?) while others seem to think liberals are too hopelessly statist to be worth bothering with. But the real problem with (2) is that liberals will plausibly suspect libertarians of indifference to their conception of basic liberal values, and so  libertarian policy advice dressed in liberal language looks like insincere Trojan Horsing on behalf of the powerful. Why listen? (3) Libertarian non-ideal theory. One might think minimal state libertarianism is correct, as a matter of ideal theory, but see that it is politically infeasible, and so conclude that a  libertarianism that makes some concessions to welfare state liberalism is second-best, and steps in that direction are small movements toward the ideal. One problem here is: How do you tell the difference between someone who actually thinks mandatory retirement accounts, for example, are the best policy for limited-government liberalism (that’s me, on days when I’m convinced that means-tested alternative can’t work), and someone who argues for mandatory retirement accounts as a small step down the road to libertopia?

So, “limited-goverment liberalism” starts with liberalism and then argues that libertarianish policies and institutions will best secure liberal aims. “Big government libertarianism” starts with traditional minimal state libertarianism, but moderates it to make marginally more libertarian policy politically feasible.

The Possibility of Big and Free

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Maybe it helps to look at some figures. Here’s the 2009 Heritage Index of Economic Freedom top 10:

Pay special attention to Denmark at 8th, which is closer to the U.S. at 6th than the U.S. is to Ireland at 4th. According to the OECD, Denmark’s government spending as a percentage of GDP is 50.8 pecent. In the U.S. it is 36.6 percent. Now, note that size of government is an input to the formula that determines the ranking. Denmark takes a HUGE HIT for that in the index. No country in the top ten has that low a score on any dimension. In fact, they take a big hit twice, because tax rates are in the formula as well. Drop the size of government from the index, but keep the tax rates (i.e. “fiscal freedom”) and Denmark would score higher than the U.S. in economic freedom. Of course, Denmark, like the U.S., gets high marks in other rankings focused on political and civil liberties, like Freedom House’s. Denmark may be culturally weird, but I think it counts as a possibility proof of very big but quite limited government. Like the Economic Freeedom rankings, you might think that such high tax rates and big government count heavily against them, but it remains that they do nearly as well or better than every other country in the world in every other aspect of economic freedom. Tax rates and government size are in fact dissociable from regulation, barriers to trade, and so forth.  

Now, I’m just trying to reinforce a conceptual distinction. I’m not for one second arguing that the U.S. should have a bigger government. I think we’d be much better off in the extremely lean neighborhood of Singapore (about 15% I think). But I also think that the size of government in the U.S. is less important than some other aspects of economic freedom, and less important than the composition of spending, some of which is both immoral and wealth destroying. 

Consider that Denmark’s size of government is similar to that of France, which scores 64th in Economic Freedom, between Uganda and Romania. The implication is that France could become immensely more economically free without doing much by way of cutting the size of its government. The way to do this would be to severely limit, as Denmark has done, the ways in which the government may intervene in the economy. Likewise, holding size of government constant, the U.S. could be doing much better, though I’m afraid we’re rapidly moving in the other direction. 

More fun facts! Hong Kong is part of communist China, and so is lacking much assurance of liberty. Singapore is more or less an authoritarian technocracy. We don’t hit a liberal state until number 3. Australia, at 34.9 percent of GDP, has a smaller government that the U.S., as does Ireland, at 34.2 percent, while New Zealand is a bit bigger at 39.9. Switzerland is also smaller (35.4%) but the rest of the list is bigger. Canada is in the neighborhood of New Zealand, Denmark is WILDLY larger than the rest of the list, and the U.K is very big at 44.6 percent. The only countries in the OECD with bigger governments than Denmark is are France (52.4%) Sweden (52.6%), and both do have fairly dismal economic freedom scores. However, Sweden seems to have the right idea, as it has refused to bail out SAAB.

Small and/or Limited Government: Some Distinctions

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I feel the liberaltarianism discussion is often muddled because of confusion over a number of different ideas. I’m going to try to clear my own head here. Maybe it will be useful to others.

I think it’s important to distinguish “small government” from “limited government,” and to distinguish between a couple different senses of “limited.”

Let’s say government is small when government spending as a percentage of national economic output is relatively low. Small government, in this sense, will tend to have relatively low taxes. But the overall tax take tells us little about how the tax burden is distributed. It doesn’t tell us what the money is spent on. And it doesn’t tell us much about economic liberty.

Which society is freer? One with a smaller government where the very rich pay all the taxes (90 percent of the population pays no taxes! 90 percent libertopia?) or one with a slightly larger government with a relatively low level of taxation spread more or less evenly over the whole population? (Should we do a poll on this?)

The fact that a government is small doesn’t rule out the possibility of egregious restrictions on non-economic liberties or of incredibly burdensome economic regulation. Suppose it takes two years to fill out all the paperwork, get all the licenses, etc. to start a small business, but once you do that, your profits aren’t taxed all. Suppose many forms of exchange are simply prohibited. You might have small government, low taxes, and very little economic freedom. Of course, a small government can ban abortion, prostitution, drugs, a free press, etc. just as well as a big one. Such a government may need to spend a lot of its modest budget on police and prisons instead of on genuine public goods. The size of the budget as as percentage of output doesn’t tell you anything about the composition of spending. This is a really important point. The United States spends a lot on prisons, the military, drug law enforcement, border patrol, etc. A lot of this is the opposite of rights-respecting, and a lot of it is downright wasteful. The composition of spending is important both as a matter or morality and a matter of economic growth (which I happen to think is also a matter of morality.)  Which is all to say, the fact that a government is small logically implies almost nothing about either liberty, justice or efficiency.

(Also, as a technical tangent, there may be economies of scale in the provision of certain public goods. So a smaller country whose government provides precisely the same goods as a bigger country may turn out to have a bigger government, simply because it costs them a little more to provide the goods. Slightly weaker economic performance relative to the bigger country may result, but a cutback in spending on those goods won’t improve performance if they are growth-enabling.)

Limited government is really what matters, but “limited” is also a bit ambiguous. The most important sense is “rights-respecting.” Bills of rights are meant to declare that legitimate (and legal) government is limited to activities that do not violate rights. Many disputes between classical and modern liberals turn on their theories of rights. For example, if the collective action problems inherent in the provision of certain public goods justifies taxation, then a state that collects taxes for this purpose does not violate property rights. If you think there is no such justification for taxation, you’ll tend to see the taxing state as violating rights and thus overstepping its proper limits. If you think there is such a justification for taxation, and believe there is an abundance of collective action problems that may be resolved only by government action, then you may think that a quite high level of taxation and government spending is perfectly consonant with limited, property-rights respecting government. 

Here’s an aside about libertarian theory that I think helps transition to another, related, idea of “limited.” Though most libertarians are not anarchists, the outsized influence of property-rights-focused anarchists within the broader libertarian community somehow seems to create a lot of confusion, when it ought to help clarify the issue. The so-called “minarchist” or “minimal government” view accepts the public goods justification of the state, while the anarchist rejects it. The anarchist argues either (1) that the protection of rights is an individual good and that individuals can successfully protect their rights by going to the market and contracting with private rights-protection agencies or (2) all public goods, including the protection of rights, can be successfully provided using markets and other forms of voluntary association. Anarchists often argue that if the public goods argument for state protection of rights (and the system of public finance it implies) is sound, then there is no principled basis for stopping at “minimal” government. The scope of legitimate government will be however wide the logic of the public goods or market failure argument happens to take you. There are a number of possible minarchist replies here (the specialness of the use of coercion in the rights protection business, etc.), but I basically think the anarchist critique is correct. If there is something especially unstable in private markets for rights protection, and that fact justifies public provision of that service, then there might be other kinds of market failures that justify the public provision of those markets’ services. 

I think this takes us to another sense of “limited government” as “limited to what non-government alternatives cannot do better.” An obvious implication of market failure arguments for state provision of certain services is that the state should not be in the business of providing services where markets or other voluntary mechanisms are superior. There’s no justification for the coercive tax-financing of state enterprises when those goods and services would be provided (usually with higher quality and a lower price) with no state coercion. Also, state enterprises will tend to crowd out private enterprises both by (a) absorbing capital and using it badly and (b) by virtue of its inherent advantages in securing anti-competitive subsidies and barriers to entry, which is all the more reason to limit government to the things we actually need it for.

Let me wrap it up. The “size” of government is not a good proxy for either economic or non-economic liberty or for economic performance. Advocates of “small government” need to worry more than they do about the moral and economic dimensions of the composition of spending, and they need to realize that they care more than they think they do about questions of “distributive justice,” which is pretty obviously manifest in enthusiasm for reforms, like the “flat” and “fair” tax.

I think our real concern ought to be limited government. But whether you think an ideally limited government is also small will depends on lots of things including your account of rights, your beliefs about the relative efficiency and reliability of state vs. market provision of various goods, your beliefs about the necessity of public spending to facilitate growth, and more. The claim behind my version of  ”liberaltarianism” is that there is a principled position between classic night-watchman “minarchism” and full-on modern liberalism. If you’re not an anarchist or totalitarian, then you think that it’s possible for the state to do either too little or too much. Minarchist libertarians seem to be a bit embarrassed by the concessions they do make on the way to arguing for a state, and so stick as close as they can to their anarchists friends without going all the way stateless. But the anarchists are right that the minarchists have, in some sense already “given away the store,” and that it would be pretty surprising if the logic of the minarchist argument allowed them to stop where they do. On the other side of the equation, modern liberals need to get more credit from libertarians in desiring and defending limited government. The governments of the successful liberal democracies are in fact remarkably limited relative to the possibilities, both in terms of respect for rights and in refraining from crowding out the efficient private provision of goods and services–which explains their success. That said, it would be pretty surprising if either the modern liberal state or modern liberal theory (which often looks suspiciously like ad hoc apologetics for the modern liberal state) gets the limits of government right as either a matter of morality or efficiency.  

There’s lots of other stuff to talk about: the paternalism of modern liberalism as a failure of limited government; the consistency of social insurance and poverty-mitigating redistribution with a principled account of limited government; and other stuff–but those are separate posts.