Will Wilkinson has a post on Wagner’s Law:
“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. . . .
There’s an abiding faith on the right that there must be policy levers that can be pulled to reduce political demand for government spending. The idea that it is possible to “starve the beast”–to reduce the size of government by starving the government of tax revenue–springs from this hope. But the actual effect of cutting taxes below the amount necessary to sustain current levels of government spending only underscores the unforgiving lawlikeness of Wagner’s Law. As our namesake Bill Niskanen showed, tax cuts that lead to budget shortfalls don’t lead to corresponding cuts in government spending. On the contrary, financing government spending through debt rather than taxes makes voters feel that government spending is cheaper than it really is, which makes them want even more of it.
I’m not entirely convinced by this argument. You could plausibly argue that Reagan’s tax cuts restrained spending in the 1990s, and that spending began rising again once the budget was balanced in 2000. But it’s at least a defensible argument.
It’s time to consider the possibility that there’s no convincing them. What if there’s no feasible path within the bounds of normal American democratic politics to significantly lower the level of government spending as a percentage of GDP? If we look at the world, what we see is that when people get richer, they want more welfare state. Maybe there’s nothing much we can do about that.
It’s quite possible that Will is correct, but I have two objections to this line of reasoning:
1. Goals in politics often look impossible until they succeed. I’m old enough to recall when marijuana legalization seemed like a pipe dream. Polls showed strong public opposition, and almost no country had legalized pot. Now a rapidly growing number of states are doing so. Gay marriage is a similar example. And here’s an example that is slightly closer to Wagner’s Law. How many people in the early 1960s (when the top income tax rate was about 90%)In would have expected a top rate of 28% by 1986, or even 43% today?
2. The ratio of G/GDP is an equilibrium outcome, reflecting a battle between those in favor of bigger government and smaller government. Here are a few data points showing that there is a lot of elasticity in Wagner’s Law (G represents government spending, not output, GDP (PPP) data is from the World Bank):
France: G/GDP = 56.1% . . GDP/capita (PPP) = $39,678
USA: G/GDP = 41.6% . . GDP/capita (PPP) = $55,837
Singapore: G/GDP = 17.1% . . GDP/capita (PPP) = $85,209
One might object that I am comparing apples and oranges, three very different economies on three different continents. But check out an economy right next door to France:
Switzerland: G/GDP = 33.8% . . GDP/capita (PPP) = $60,635
Another objection is that while the cross sectional data is uneven, government always grows rapidly within any given economy, as it grows over time. Perhaps, but AFAIK Singapore’s government spent about 15% of GDP back in 1970, suggesting very little growth in government during a 45-year period of dramatic economic growth. Small government in rich countries is rare, but it’s not impossible.
My point in these examples is not to show that Wagner’s Law is wrong—Will is correct that the correlation is strongly positive, merely that there is substantial variation. Think of the US ratio of 41.6% as representing an equilibrium outcome, arising from a battle between those who favor a Singapore-sized government, and people like Paul Krugman who praise the French model. Perhaps if the right had not fought for smaller government then our government would be even larger today.
Giving up on the quixotic quest to find the magic words or the magic policy lever that would finally and decisively falsify Wagner’s Law would also lead us to distinguish more clearly between the welfare state and the regulatory state, and to focus our energy on removing regulatory barriers to economic participation, innovation, and growth. We’ll see more clearly that a small government and a limited government that reliably protects rights and promotes freedom aren’t really the same thing. And we’ll begin to recognize that sowing antagonism to the welfare state hasn’t accomplished anything very constructive. The war against the welfare state hasn’t slowed growth in welfare-state spending so much as it has made our system unusually loathed and unusually shoddy. Mostly, it has fostered a divisive, racially-tinged “makers vs. takers” narrative while encouraging opposition to reform measures that might have made our safety net fairer, more efficient, and better at minimizing the economic anxieties that drive populist political sentiments fundamentally at odds with an open society of free markets, free trade, liberal migration, and peace.
Arnold Kling responded to this paragraph (and some anti-libertarian comments by Noah Smith) as follows:
1. I do not believe that either Smith or Wilkinson is sincerely trying to appeal to libertarians. . . . They are not trying to pass an ideological Turing test. Instead, they employ slurs and charges against libertarians that are popular on the left, which suggests to me that the motive is not to offer constructive suggestions to libertarians. It is not Cato and Reason that are trying to inject racial overtones into American politics. And it is not that I believe in the absolute perfection of markets-what I believe is that markets are better than government at adapting to solve problems.
2. I am not going to be bullied into supporting policies that I believe are bad just because they are popular. If you want to talk me out of my position against a policy, tell me what is good about the policy.
3. The welfare state, like any Ponzi scheme, can be quite popular as long as it is still functioning. However, some time in the next decade, I think it is probable that one of the major welfare states is going to be unable to borrow enough to meet all of its current obligations . . .
I have some sympathy for both sides. Will is right that the GOP often defends subsidies or trade barriers for their people (farmers, car dealers, Medicare recipients, etc.), while eagerly cutting benefits to “those people” (Medicaid, foods stamps, housing subsidies). And yes, I strongly suspect that race is an issue among some members of the right, especially within the GOP. Arnold is right that opposition to big government among intellectual libertarians is much more idealistic, and as far as I know is not at all racially motivated. Many go out of their way to suggest first cutting middle class subsidies.
Arnold’s right that we should not to be intimidated by the other side. I’m a strong opponent of the extreme anti-free speech elements in campus political correctness. And I’m not going to let Trump’s embarrassing lack of “reasonable” political correctness deter me from holding on to those views. I’m a strong believer that we’d be better off with a Singapore size government than a French size government, and I’m not going to be deterred by the fact that some racists in the Tea Party also talk about small government, particularly given that this recent election showed that those arguments were hollow on much of the right, a mask for a crude grab at power and dominance over “those people”.
PS. Will also suggests that we small government types might be able to make more progress with regulatory reform than shrinking government spending. I think that’s probably true. But we still need to push back against big government, especially now that we have a new president:
On the campaign trail on Tuesday, for example, Donald Trump told supporters, “We have 41 days to make possible every dream you’ve ever dreamed.” Oddly enough, it’s apparently part of Trump’s new pitch: NBC News’ Katy Tur noticed the Republican nominee make a similar comment a day later.
“You have 40 days until the election. You have 40 days to make every dream you ever dreamed for your country come true.”
Yesterday, Trump also reportedly vowed to supporters he’d “fulfill every single wish” they have for his presidency.
Not quite sure what that means, but “fulfill every single wish” doesn’t sound like austerity to me.
Here’s my dream, Mr. Trump:
HT: David Henderson, Jonah Goldberg
READER COMMENTS
Lawrence D'Anna
Nov 12 2016 at 2:23pm
The problem is they’re allowed to vote on taxes and spending as if they are separate issues. Instead they should have to write a parametric tax code, with rates set automatically based on spending.
David R. Henderson
Nov 12 2016 at 2:44pm
Good post.
Great line: “I’m old enough to recall when marijuana legalization seemed like a pipe dream.”
By the way, I’m old enough to remember when I was 16 and someone mentioned marijuana and I said, “What’s that?”
marcus nunes
Nov 12 2016 at 3:12pm
Level of Public Spending and Weight of Government. It´s the second that “bogs down” the economy
https://thefaintofheart.wordpress.com/2012/04/22/it%C2%B4s-not-so-much-the-level-of-public-debt-but-the-weight-of-government-that-tends-to-slow-growth/
Gwen T.
Nov 12 2016 at 3:30pm
Vote for Pedro and all your wildest dreams will come true.
Rajat
Nov 12 2016 at 4:19pm
Thanks for this post, Scott. I was wondering whether and how you would respond to this argument.
I am a bit confused, though, as to what Wilkenson actually means when he refers to cutting back the regulatory state and protecting (or expanding?) the welfare state, in order to get beyond the “‘makers vs takers’ narrative” and to make “our safety net fairer, more efficient, and better at minimizing the economic anxieties.”
On the one hand, he could be referring to more generous benefits at the bottom, but also more means-testing, as occurs in Australia. That certainly leads to a very ‘efficient’ safety-net, because ‘churn’ is minimised and transfers as a proportion of GDP are low. However, this does lead to high effective marginal tax rates (EMTRs), which deter many people from working or increasing their hours. Many women with children barely gain when moving from 3 days work per week to 5. It also leads to some of a ‘makers vs takers’ narrative in political debate.
On the other hand, Wilkenson could be suggesting the US move to much less means-testing and more unconditional benefits. This could mean lower EMTRs and less class warfare, but it would mean much higher transfers as a % of GDP. That might produce more efficient outcomes, but as it would involve a lot of churn, it’s not what many would refer to as an efficient welfare state.
My sense is that Australia and many European countries continue to grow at reasonable rates because the willingness of many men with families to work hard is pretty-much unaffected by high and rising marginal tax rates. And as they are the ones responsible for producing much GDP, life goes on.
Andrew_FL
Nov 12 2016 at 4:56pm
Actually Trump’s base and the tea party are distinct groups of people but you do you.
Lewis
Nov 12 2016 at 10:10pm
While it’d hard to quantify, I think it’s worth adding a wrinkle to the discussion of G/GDP as measuring the size of government. It is this: if the government provides people with cash or a lot of the same goods and services they would have consumed anyway, the government ought to be treated as being somewhat smaller than a government with the same G that buys totally different goods and services from what people would otherwise consume.
I started to think this way after living in the UK. There, G/GDP is much larger, but it doesn’t feel much larger than in the US really. I decided this is because so much of their G goes to welfare, pensions and housing that is, often, pretty similar in quality and to American poor people’s housing. So you pay high taxes, but a lot of what you get in return is what you would’ve bought yourself. The NHS isn’t even that expensive considering it covers everyone in the country.
By contrast, US government feels larger than G/GDP indicates. The reason is that the US government spends lots of money on prisons and military and gold-plated, cost-ineffective medicine and education. The money doesn’t come back into your household as either cash payment or as something you would’ve bought yourself. Look at the cost of some of the procedures Medicare buys, for instance, or the per-pupil budgets for some public schools.
By contrast, social security doesn’t feel like big government because it’s just a check people get to spend themselves. If our social security taxes were spent on more prisons or military, I’d say the US government ought to be counted as “larger” than it is.
Gray
Nov 13 2016 at 8:47am
Rajat you claim rising marginal tax rates in Australia. Actually they have declined. Are you talking about effective taxation rather than just maripginal income tax rates? I think that’s down too. Like the US, but in a different league, our budget deficits are climbing though.
Scott Sumner
Nov 13 2016 at 10:09am
Thanks David.
Rajat, Good point. I agree about the implicit MTRs, but Will might respond that there are ways of making the system more efficient without worsening the IMTRs. I don’t entirely agree with him on transfers, but he has a good point.
Andrew, Trump has enormous support among Tea Party types. The Tea Party began as a sort of free market, small government group, but gradually changed into a right wing nationalist organization.
Lewis, Very good points. When I went to the doctor in the UK it seemed totally different from the US. That’s not really a criticism of the UK, as I think medical care quality in America is far too high. And even the US system isn’t really a free market system, as you point out. Even the tax deduction part of the “private” US medical system could be viewed as “government spending”.
Thaomas
Nov 13 2016 at 11:42am
While I suspect that Wagner’s law is normatively proper — higher incomes and more complex economic interactions create more market failures that need to be addressed and that helping the less fortunate is a normal consumption good, I think the size of government issue is a category mistake. If government is “too big” is means that one or more of the zillion things it does should not be done at all, should be cut back, or should be done more efficiently. And if new program X is proposed, the right question is not “does it expand government?? but “do costs exceed benefits?” It is a similar to the error about the size of the government deficit; the size per se should not be part of any taxing or spending decision.
Rajat
Nov 13 2016 at 2:32pm
Gray, marginal tax rates at the upper end have risen in the last 7-8 years. Partly due to bracket creep, but also due to various levies (increase in Medicare levy, flood levy and now the budget repair levy) and and higher taxes on concessional super contributions for high-income earners. Plus, I expect taxes on savings for these workers will keep rising via higher super taxes or tighter limits, property (limits on negative gearing) and shares (there’s been talk of removing imputation).
Mark Crankshaw
Nov 13 2016 at 3:03pm
Will Wilkinson writes:
I think this statement demonstrates just how out of touch the Leftist elite is with the reality of life in the areas that Trump electorally dominated. I was raised in the northern fringes of Appalachia, right in the heart of the Rust Belt. Rural Upstate New York has experienced unending and uninterrupted economic decline for at least 50 years.
Welfare is extremely prevalent in this region yet the antipathy for welfare there is not “racial” since the overwhelming majority of welfare recipients there are not racial minorities. That’s only the case in Clinton country (those urban parts of the country that voted heavily for her). Neither of my parents had a college degree and I saw, at first hand, how little the “welfare state” did for people who are willing and able to work hard and do whatever it took to “do the right thing” (i.e., stay married, sober and working full-time) and the high cost of the economic anxiety and uncertainty felt by those working in a dying economy.
The whole point, obviously lost on Mr. Wilkinson, is that “welfare spending”–the entire liberal “enterprise” –has done absolutely nothing to begin “minimizing the economic anxieties” of the working class, but on the contrary, welfare is by design tailored only to help those unwilling or unable to work and all to the political benefit of affluent urban elitists. Welfare is divisive, alright, but by design and with the enthusiastic support of the Left. Reforms that include helping those who work full-time exist only in the imagination of Mr. Wilkinson.
Race need have nothing to do with it. However, for Mr. Wilkinsons’ political vitriol to have any moral impact, he must insist that it does. Otherwise, his complaints ring rather hollow: that many economically suffering people loathe a set of costly social programs for which they must pay but from which they will not benefit lacks the same moral “punch” as “hatred” and “racism”.
Donald Trump won the Election because at least he could identify that there was a problem in rural America while Hillary had to defend the “Obama Economy” by denying there was none. The liberals are clutching at “racism”, “sexism” and other bilge precisely because they have never bothered to address the concerns of the rural white working class and are devoted only to the cause of the urban, the non-white and the non-working…
I strongly favor free markets, free trade and peace (on net immigration, but I’m also not so crazy about having a pathway to citizenship for millions whose political sympathies are statist and left-of-center). I believe that, on net, those policies are better than the alternatives. However, the impact of those policies are not uniformly felt, some parts of the country benefit disproportionately while others are harmed almost equally so. Clinton got the support of those on the plus side, while Trump got those on the negative side of the equation. Fatally for her electoral chances, Clinton offered absolutely nothing of substance to address the economic concerns of those on the negative side other than abusive slander of Trump. One does not have to be “at odds” with free trade, free markets and peace to admit that something should be done to address and even mitigate the disparities of the effects of those policies. Calling those who are harmed by those policies “racists”, “Nazis” or “bigots” is not a serious substitute for mitigating those disparities…but it does appear to be about all the Left has on offer.
Anonymous
Nov 13 2016 at 3:24pm
I’m almost entirely uninvested in abstract philosophical ‘freedom’ arguments, but even so I can’t help but notice how weak is the claim that tax rates have nothing to do with freedom. Working for money is to a considerable extent a mechanism for achieving goals; if you want more then you work harder, put more effort into furthering your career, if you prefer less money and less stress then you don’t. Being unable to make that choice, unable to decide how to sell your labor, because (in the extreme) no matter how much or little work you do you get the same return, seems to me a clear loss of some aspect of freedom.
Andrew_FL
Nov 13 2016 at 5:03pm
That response wasn’t totally typical of the way you treat people who disagree with you like students in need of corrective from teacher at all.
Scott Sumner
Nov 13 2016 at 5:04pm
Mark, First of all, it’s kind of misleading to suggest that Will Wilkinson is part of the “leftist elite.” Actual members of the leftist elite look down on libertarian-leaning pundits like Will.
Second, I don’t think he’s saying that all opposition to welfare is racially motivated. I dislike many aspects of our welfare system, and I don’t think my opposition is racially motivated. But I do think there is strong evidence that race plays a role here—just consider which sorts of government subsidies the GOP supports and which type they oppose.
Anonymous, I agree that tax rates affect freedom. However it’s a matter of degree, I think Will is saying that many other economic issues are more important in terms of impact on freedom.
Weir
Nov 13 2016 at 9:28pm
Yes, nobody must be permitted to draw the distinction between makers and takers, as Will Wilkinson says, because it’s thoughtcrime, doubleplusungood. But what about lifters and leaners? It’s from a 1942 speech by Robert Menzies, about Australians in Australia when Australia was almost entirely white. Or what about the distinction that William Graham Sumner made in 1876 between Person C and Person X. Person C is the man who works. He’s the man who pays. He’s the forgotten man. It’s not necessary to confront these arguments on their merits?
Surely if it’s Will Wilkinson who can hear the racial dogwhistle, then it’s Will Wilkinson who is thinking a little too much about some person’s race?
Go back to 2009. People in the Tea Party are talking about debt and taxes. People who don’t want to confront those arguments just bully the and ridicule these people as low status, low class, racist, hicks. It was a slur, and it worked. Will Wilkinson can appreciate an effective slur when he sees one. The downside is that it works too well. If polite and well-mannered people get tired of being called racists and Nazis, then vulgarians have the room to themselves.
Will Wilkinson
Nov 14 2016 at 10:31am
Thanks for this post, Scott.
Re your misgivings up top…
1. I agree, which is why I tried to be circumspect about the lawlikeness of the regularity. I know you’re familiar with the postmodernization literature–people get more generally liberal (secular/rational vs. religious & self-expressive/individualist vs. traditionalist/communitarian) as they get wealthier. I’m interested in the possibility that social spending is a democratic reflection of that shift. Clearly, this has to be something that’s culturally/ideologically mediated. So a different gloss on the best way to express secular, expressive values in policy (maybe more like Singapore?) could surely change the democratic expression of liberalization. And different glosses surely explain the variation in the size of welfare states, even through the overall trends are pretty consistent — which speaks to your point 2.
I too like the Singapore model, but I genuinely worry there’s no democratic path to it.
I think it’s important to not let government growth runaway, but I do wonder about tradeoffs. If you could buy a huge amount of growth-conducive deregulation and increased economic liberty in exchange for a ton of infrastructure spending or some increased safety-net spending, and people would be wealthier and more free overall, wouldn’t opposing it be perverse?
Foxhuntingman
Nov 14 2016 at 11:25am
I actually attended a large tea party event near Detroit, and there was absolutely nothing racist about it. I think your slur of the tea party movement is a very cheap shot.
Remorandum
Nov 14 2016 at 5:34pm
A key point in Will’s comments that Scott overlooks is that Will is talking about what’s possible in a US-like democratic system. The level of control that the Singapore government exercises over the country’s population might make many in the US blanch…
Floccina
Nov 15 2016 at 2:20pm
Social Security and FICA are sold not as tax and transfer/welfare but as annuities (yes educated people know better), if you exclude SS USA gov. looks smaller yet and I do not think that is unreasonable. I do not know about the French retirement scheme, the Australian one looks more like welfare.
BTW Social Security is a welfare program disguised as a Ponzi scheme to make it acceptable;e to the voters.
TMC
Nov 15 2016 at 11:04pm
I’m another one who thinks your calling the Tea Part racist is off base. You’re watching too much MSNBC. One of their stories had a close up of someone open carrying calling it a racist action to scare black folks. The local TV station had the longer shot of it showing it was a black guy carrying the gun. There are, unfortunately, racists on both sides. It seems the left has the greater number though. Also your list of subsidies, you subsidize what you want more of, correct?
Mark Crankshaw
Nov 16 2016 at 8:32am
@ Scott Sumner and Will Wilkinson
After reading the article in full (as well as some others) I must admit I erred in my description of Mr. Wilkinson as ‘leftist’ or ‘elitist’.
I still disagree with the premise outlined above, of course. My concern, and the reason for my push-back is that it is the Democratic Party has long used left-leaning support for the ‘welfare state’ to advance their anti-market, anti-competitive regulatory agenda. The ‘welfare state’ in the US is qualitatively different than the European model: there has been a concerted effort to develop a ‘welfare state’ that fosters dependence upon government. The ‘welfare state’, as implemented in the US, undermines the family, eviscerates community, and cements those in poverty permanently. It does this by segregating the ‘poor’ into jobless urban ghettos (see Detroit) and locks others into failing rural backwaters (where I grew up) then blocks any meaningful educational reforms thus sentencing the children of the poor into a endless cycle of poverty. There are no counterparts in Europe to level of political and economic dysfunction exhibited in Detroit (though Glasgow may have given it a go).
To the extent that there is a push-back to the ‘welfare state’ there has been a limit placed on the Democrats ability to push the regulatory state malfeasance they insist accompanies the welfare state.
I especially push-back towards the ‘racist’ explanation for the opposition to the welfare state (and the noxious regulatory state the Democrats package with it). As we speak, the extreme Left, the Democratic Party, and the liberal-leaning media are peddling the narrative that any opposition to their policies can not be arrived at through a reasoned, principled and logical understanding of economics or politics. They insist, therefore, that any opposition to their policies must be unreasonable, unprincipled, and illogical.
Any opposition, they insist, must be the result of a ‘phobia’, driven by ‘fear’ or ‘hate’, or ‘racism’. This narrative must be vigorously pushed back against. On the contrary, a deep understanding of basic economic principles and an understanding of politics helps expose the deep flaws of the leftist welfare-regulatory approach favored by the Democratic Party. I want my children to have a good future, with lots of opportunities. Being told that therefore I am a racist is starting to wear pretty thin…
Mark Crankshaw
Nov 16 2016 at 9:21am
@ Will Wilkinson
This is precisely what the Democratic Party, and the voters that support them, are not going to be offering. They have never supported such a trade-off, are not supporting such a trade-off, and will fight like a cornered rat to oppose such a trade-off in the future.
The reason the Left favors ‘increased safety-net spending’ is to create a dependent class that will support the Democratic Party precisely so that they can implement growth-diminishing regulation and decreased economic liberty. The consequence of their policies has been, and will likely continue to be, a country that is poorer (and where the concentration of wealth increases in the affluent urban parts of the country that voted last week for Hillary at the expense of the rest of the country), and a populace that is much, much less free in the economic sphere.
I would phrase this even stronger, the only reason affluent Democrats favor ‘social welfare spending’ or ‘infrastructure’ is precisely because it affords them the political support that enables them to exploit the regulatory state at the expense of the poor and middle classes. I despise the Democrats not because they are ‘do-gooders’, but because they are not, rather they are deceptive exploitative hypocrites.
I’d love to buy any amount of this trade-off (a ‘huge amount’ would be even better), but to understand the Democratic Party is to understand that trade-off is not for sale if they have anything at all to do with it. Instead, the Democrats will take your offer of more social spending and then ram ever more burdensome regulation and costly vote-buying boondoggles right down our throats. Like they have always done…
Weir
Nov 17 2016 at 6:13pm
The problem of free-riders is about as old as it gets. Even in a band of hunters and gatherers you get co-operators and defectors. The problem then gets a lot worse with the invention of agriculture, because you get a class of unproductive priests and warriors, taking first cut of everything, at the head of the queue. These are the ruling pirates and stationary bandits, eating out our substance. So the distinction between makers and takers is more than a narrative. It’s the definition of politics. Plunder made legal: That’s what politics is.
“Justice being taken away, then, what are kingdoms but great robberies? For what are robberies themselves, but little kingdoms? The band itself is made up of men; it is ruled by the authority of a prince, it is knit together by the pact of the confederacy; the booty is divided by the law agreed on.” As St Augustine said.
So in addition to backfiring spectacularly, playing the race card against St Augustine’s argument is a non-starter, because St Augustine’s argument is true. It’s correct. It’s accurate. Pirates are real. Robbers do exist.
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