Arnold Kling  

Economic Policy Analysis

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Whoever is writing the lead editorials for the Washington Post (I suspect Sebastian Mallaby) on economic policy issues in this year's election is providing pieces that are highly educational. Today's editorial is called The Growth Mystery.


we don't know how to repeat the 1990s miracle, and the government's policy options -- a trade deal, tort reform, deregulation -- aren't powerful enough to do it. The productivity revolution inside American companies seems to have reflected technological and organizational changes that had been percolating inside corporations for at least a decade, none of which had much to do with government policy.

Concerning tax cuts and economic growth, the editorial makes this point:

Lower tax rates on wages do boost the labor supply; lower tax rates on investment may boost savings; more labor and more capital mean more economic output. But Mr. Bush's tax cuts also have an offsetting consequence. Because they have not been accompanied by spending cuts, government borrowing has gone up, nudging everybody's cost of borrowing higher than it would be otherwise. A range of econometric studies suggest that these opposing impacts -- more labor and capital on the one hand, higher interest rates on the other -- roughly cancel one another out.

For my (similar) thoughts on tax cuts and long-run growth, see Economics vs. Populism and Whose Supply-Side Are You On?

Yesterday's Post editorial looked at the tax cuts in the context of the long-run fiscal situation.


The share of government in GDP has more than quadrupled in the United States over the past century, and a World Bank cross-country study has shown that the richer a country, the larger the share of its resources that flows through the government. As people grow richer, their appetites for newer and jazzier consumer durables taper off, and the things they want more of include health, education, clean air and safety from threats both foreign and domestic. These things are often provided by the government. To starve the government with tax cuts is to misread this trend.

The editorial looks at Social Security privatization.

privatization is a way of shifting the nation from a pay-go system to a pre-funded one. Savings would become more plentiful.

See also my essay The Ultimate Lockbox.

The editorial later says,


The Berkeley-Brookings projections put the size of the deficit in 2040 at 20 percent of GDP, so containing Social Security costs might address one-twentieth of the problem...
The dirty little secret about Social Security is that it's too small to transform the fiscal future. For all the books and seminars devoted to the subject, it is a side show next to the policies we consider in our next two pieces: the growth rate and health care.

This is the conclusion that I spelled out in The Great Race.

For Discussion. Yesterday's editorial argues that the share of government in the economy has been growing because as incomes rise people want relatively more of the types of services provided by government. Is this an inevitable trend? Will anything slow it down, or will the private sector continue to shrink as a share of the economy?



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/105
The author at The Liberal Order in a related article titled Growth of Government writes:
    Arnold Kling discusses a Washington Post editorial from Sunday. The writer of the editorial claims that as a nation becomes wealthier its citizens' demand for durable goods tapers off while their demand for more government services increases, which sup... [Tracked on August 19, 2004 9:18 AM]
COMMENTS (4 to date)
Tom writes:

[T]he share of government in the economy has been growing because as incomes rise people want relatively more of the types of services provided by government... Not so. The political process is dominated by interest groups, nanny groups, and the pork barrel. The benefits of particular government programs are aimed at those who support the programs and reap the benefits -- and so they have allied in mutual support of each other, at the expense of those who don't reap the benefits but pay for them. This proves nothing about what people -- in the aggregate -- want and everything about the cost of corrupting the Constitution to expand the writ of Congress beyond its enumerated powers. As FDR's aide, Harry Hopkins, said: “We shall tax and tax, spend and spend, and elect and elect. That will be mandate enough.”

DSpears writes:

This may be slightly off topic, but I find Mead's characterizations of the foreign policies of his 4 schools pretty accurate, but he misses the reality of most of these fathers of the schools of thought. Jefferson and Jackson were laissez faire free-traders, not protectionists. Hamilton was an ardent protectionist and believed in the british mercantilist system of subsidies and government granted monopolies to encourage growth.

Trade protectionism was adopted by populists long after the death of Jackson. Until the turn of the century trade protectionism was exclusively the stock and trade of wealthy manufacturers looking for the government to reduce their domestic competition, not poor mechanics and farmers trying to protect their jobs.

Lawrance George Lux writes:

I tend to agree with Tom. What Studies I have seen and made have suggested Recipients of any Government program are relatively reduced to the same Income and living standard as prior to introduction of the program within the development period of the program. The Elderly pay more for medical service now, than they did prior to the introduction of Medicare. This medical service keep them alive longer, but at a lower standard of living. Only the bureaucracy and Providers receive viable benefit. Examination of other Fed and State programs exhibit the same effect: Budget parasites learn to properly feed from the Government trough, while the intended Benefiters must have it to stay in place. lgl

Randy Peterson writes:

I read the Growth Mystery editorial in the Washington Post and it appeared to contradict some statistics shown on this website in recent weeks. The first paragraph of the Post article implies that productivity growth was higher in Clinton's second term than it is now. You recently showed data that proves productivity growth has been much higher under the Bush administration. Is the Post ignoring this fact?

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