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Saturday, March 26, 2011

The government that governs least governs Somalia: More government can mean more freedom

by John MacBeath Watkins

The notion that "the government that governs least governs best" has had a stern test in Somalia. Thomas Paine's aphorism has its limits, as he recognized when he said it.

Paine called government a necessary evil. We now have an active political movement questioning the "necessary" part of that assessment. The March 19-25 edition of my favorite news magazine, The Economist, has in it a "leader" (the Brit term for an editorial) titled "Taming Leviathan," in which it makes the claim that slimming the state in essential, and should be the focus of elections in Western democracies.

The Economist does recognize that in some countries, the state is too small, and not just in failed states like Somalia. It cites the example of Guatemala, where the tax take is around a tenth of gross domestic product and private security guards are five times more numerous than the Guatemalan police and army combined.

Of course, a market libertarian might ask why that's a problem. The answer might be that if people of great wealth have at their disposal more power than the state, those who do not possess such wealth lose access to justice. This is a non-economic answer to the question of what size the state should be, but all answers to this question are non-economic, because economics hasn't devoted much study to the question of how large the state should be.

Economics has studied how large a currency area should be. It has studied optimal size for a firm. But the question of how large a state is required for the economy to function is an issue on which people make claims about the economic impact of government spending without an actual economic model supporting those claims. The Economist, for example, claims that "rich-world governments are on a course to bankruptcy -- unless they raise taxes to levels that would wreck their economies."

America is a rich, world country, so let's see how that statement holds up:


This chart, which comes from here, shows that total government spending as a percent of GDP is actually about the same as in 1951. Of course, we are richer than we were in 1951, so the government is taking a piece of a bigger pie, but is that the crisis that The Economist describes? Keep in mind that spending as a percent of GDP always rises in a recession, both because of the social safety net and because the GDP is smaller. That's what a recession is. But if we are in danger of bankruptcy -- and the bond markets don't seem to think so -- it won't be because spending as a percent of GDP is out of hand. It will be because the willingness to pay for what we're spending has eroded.

We are, after all, a democracy. Presumably, there is some relationship between the actions of our government and the wishes of the voters. If Florida Governor Rick Scott is right about the wishes of the voters, they will reward him for turning down funds to build high-speed rail in his state, a federally-funded project that would have represented a substantial transfer of wealth from the country as a whole to the state of Florida. If he's wrong, the next election will give them a chance to replace him with someone friendlier to the notion of accepting such proffered largess.

Of course, demand for public goods like high-speed rail is only one part of the equation. Government spending as a percent of GDP might remain constant because the level of economic activity requires certain government expenditures, or it might be because government expenditures are necessary for economic growth. An example of the latter would be the Good Roads movement of the 1870s through the 1920s.

Early in the existence of this country, post roads were one of the backbones of economic development, as the government built roads for mail delivery that could be used for other purposes. When I was growing up in Maine, the old post road was a few blocks from our house. Roads that tied the country together were useful in making Americans feel that they were all part of one country, and were also useful for moving goods from where they were produced to where the customers for those goods lived.

But by the 1870s, it was clear that more good roads were needed. Roads built by a county government might end at the county line, or simply not meet the road the next county had built. Most roads were dirt or gravel, dusty in summer and muddy when it rained. Bicyclists played a leading role in the movement for better roads, with the League of American Wheelmen (now the League of American Bicyclists) beginning publication of the house organ of the movement, Good Roads Magazine, in 1892. Bicyclists and bicycle manufacturers were not the only advocates of public expenditures on roads. Chambers of commerce were also interested in getting roads built to their communities so that businesses could grow. In the 1950s, Dwight Eisenhower, who had in 1919 been assigned as an observer to the army's Transcontinental Motor Convoy, which took 62 days to cross the country, spearheaded the Interstate Highway System, one of motors of economic development in the 1950s through the 1970s, and still important in maintaining our level of economic activity now that it is complete.

Courts also play a role in development. Diversified conglomerates, a type of company that has lost favor in rich countries, are still quite important in developing countries. On reason given for this is that coordinating different activities between branches of the same company is easier than coordinating different companies.

An incompetent or corrupt government will not be effective in enforcing contracts, which means dealing with your own branches will produce better results than working with independent contractors. Rich-country management gurus like to tell companies to stick to their core competence, but in countries with underdeveloped government institutions, a company's core competence may be its ability to get its various parts to deal with each other honestly. Businessmen love to hate lawyers, until someone tries to screw them over. Then they happily resort to the courts.

The result, in rich countries, is the development of companies that can be really good at the of business they specialize in, and are not tied to divisions in tangentially related fields. I suspect that government regulation and effective courts allow such companies to operate more efficiently and produce more wealth than they would as part of a conglomerate.

In effect, the optimal size (and shape) of the firm is dictated in part by how well government frees them from the task of making sure the partners they depend on will deal with them fairly. In other words, more government may produce more economic freedom of a certain sort.

If the notion of more government producing more economic freedom seem counter-intuitive, consider Somalia. A businessman can't count on a ship carrying goods to arrive in port without being seized by pirates, can't count on delivering goods to the next town without them being stolen by bandits, and can't count on surviving a business trip to the next town -- or, sometimes, across town.

The early liberal thinkers, of course, anticipated this problem. Thomas Hobbes saw the formation of civil society as essential to protect people from the risk of violent death. Somalia has in essence become the sort of state of nature Hobbes described in his book, Leviathan. I know that I've quoted this before, but since The Economist speaks in terms of "Taming Leviathan," perhaps we should remember what Hobbes saw in the absence of Leviathan:

In such condition, there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continuall feare, and danger of violent death; And the life of man, solitary, poore, nasty, brutish, and short.

Certainly it is possible to have too much government, and North Korea is an excellent example of this. But government is essential to, as Hobbes would put it, make a "place for industry." Some level of state is needed, so instead of simple bromides about how the state must always be made smaller, perhaps we should be talking about what sort of government we need, and how much. We now have an entire political party that seems certain that, as Michael Steele, while Republican National Committee Chairman said, "Let's get this notion out of our heads that the government create jobs. Not in the history of mankind has the government ever created a job."

 As the son of a career Air Force officer, I find this offensive, and I find it offensive that no Republican elected official of any standing pointed out what nonsense this was at the time. My father certainly didn't spend his Air Force career on welfare. He did important work, and by protecting our country he contributed to its wealth, helping make a "place for industry."

Doubtless there is waste in government, just as there is waste in industry. We must always be vigilant to keep government from doing things it ought not to do, and to make sure it functions effectively at those things it should be doing.

But let's jettison the notion that the optimum size of government is always smaller than whatever it is. Let's talk instead about what government should and should not be doing, and how it can do better the things it should do. And let's keep in mind, too little government in the wrong areas can make the country poorer and less free.

Edited to add: Check out this take on the relationship between public expenditures and economic growth.

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