Does Technology Drive The Growth of Government?

Tyler Cowen.

Introduction.

Why is government so large in the Western world? This has been a question of central importance to the Mont Pelerin society since its very beginnings.

I start with what Gordon Tullock (1994) has called the paradox of government growth. Before the late nineteenth century, government was a very small percentage of gross domestic product in most Western countries, typically no more than five percent. In most cases this state of affairs had persisted for well over a century, often for many centuries. The twentieth century, however, saw the growth of governments, across the Western world, to forty or fifty percent of gross domestic product. Other measures of government intervention, such as the regulatory burden, have grown as well. Whether or not we think these developments are desirable, they are among the most important features of the last one hundred and fifty years and they cry out for explanation. My basic focus is on the United States, although a comparative perspective can help us make sense of the evidence. I’d like to address the key question of why limited government and free markets have so fallen out of favor. Of course this investigation is only one small piece of that larger puzzle.

Read full.

Highlights from "Does Technology Drive the Growth of Government?"

Bryan Caplan.


Thanks to the half dozen people who sent me copies of Cowen's "Does Technology Drive the Growth of Government?"  The paper's even better than I remember.  Highlights:

The puzzle, courtesy of the great Tullock:

I start with what Gordon Tullock (1994) has called the paradox of government growth. Before the late nineteenth century, government was a very small percentage of gross domestic product in most Western countries, typically no more than five percent. In most cases this state of affairs had persisted for well over a century, often for many centuries. The twentieth century, however, saw the growth of governments, across the Western world, to forty or fifty percent of gross domestic product... I'd like to address the key  question of why limited government and free markets have so fallen out of favor.

Inadequacies of public choice theories of government growth:

Public choice analysis has generated many theories of why government grows and why that growth is inevitable. Special interest groups, voter ignorance, and the pressures of war all are cited in this context. Those theories, however, at best explain the twentieth century, rather than the historical pattern more generally. Until the late nineteenth century, governments were not growing very rapidly. The standard public choice accounts do not contain enough institutional differentiation to account for no government growth in one period and rapid government growth in another period. 

Inadequacies of ideological theories of government growth:

According to this claim, the philosophy of classical liberalism declined in the mid- to late nineteenth century. This may be attributed to the rise of socialist doctrine, internal contradictions in the classical liberal position, the rise of democracy, or perhaps the rise of a professional intellectual class. While the ideology hypothesis has merit, it is unlikely to provide a final answer to the Tullock paradox. To some extent ideology stems from broader social conditions. Ideologies changed, in part, because intellectuals perceived a benefit to promoting ideas of larger government, rather than promoting classical liberalism.

I'd add, "Is it really true that in 1890, the typical voter staunchly supported free trade and free migration and staunchly opposed redistributive regulation and taxation?"

Inadequacies of ratchet theories of government growth:

The ratchet effect becomes much stronger in the twentieth century than before. Furthermore most forms of governmental growth probably would have occurred in the absence of war. The example of Sweden is instructive. Sweden avoided both World Wars, and had a relatively mild depression in the 1930s, but has one of the largest governments, relative to the size of its economy, in the developed world. The war hypothesis also does not explain all of the chronology of observed growth. Many Western countries were well on a path towards larger government before the First World War. And the 1970s were a significant period for government growth in many nations, despite the prosperity and relative calm of the 1960s.

Inadequacies of franchise extension theories of government growth:

The hypothesis of franchise extension, however, again leaves much unexplained. First, non-democratic regimes, such as Franco's Spain, illustrate similar patterns of government growth as do the democracies. Second, much of the Western world was fully democratized by the 1920s. Most governmental growth comes well after that date, and some of it, such as Bismarck's Germany, comes well before that time. Third, and most fundamentally, white male property owners today do not favor extremely small government, though they do tend to be more economically conservative than female voters.

The last sentence is so obvious yet so ignored.

Tyler then promisingly begins by acknowledging the ultimate power of public opinion:

No matter how incomplete it may be, there clearly must be something to the voter hypothesis. That is, there must be some demand for big government. If all or most voters, circa 2009, wanted their government to be five percent of gross domestic product, some candidate would run on that platform and win. Change might prove difficult to accomplish, but we would at least observe politicians staking out that position as a rhetorical high  ground. In today's world we do not observe this. Voter preferences for intervention are therefore a necessary condition for sustained large government. Democratic government cannot grow large, and stay large, against the express wishes of a substantial majority of the population.

Next he turns to the many technological changes that pumped up demand for big government.  You can quarrel with the specifics, but his summation is excellent:

[N]o one of these technological advances serves as the cause of governmental growth. Taken as a group, however, these factors made very large government possible for the first time.

To see this, perform a very simple thought experiment. Assume that we had no cars, no trucks, no planes, no telephones, no TV or radio, and no rail network. Of course we would all be much poorer. But how large could government be? Government might take on more characteristics of a petty tyrant, but we would not expect to find the modern administrative state, commanding forty to fifty percent of gross domestic product in the developed nations, and reaching into the lives of every individual daily.

He adds:

Think also about the timing of these innovations. The lag between technology and governmental growth is not a very long one. The technologies discussed above all had slightly different rates of arrival and dissemination, but came clustered in the same general period. With the exception of the railroads and the telegraph (both coming into widespread use in the mid-nineteenth century), none predated the late nineteenth century, exactly the time when governmental growth gets underway in most parts of the West. The widespread dissemination of these technologies often comes in the 1920s and 1930s, exactly when  many Western governments grew most rapidly, leading sometimes to totalitarian extremes. The relatively short time lag suggests that strong pressures for government growth already were in place. Once significant governmental growth became technologically possible, that growth came quickly.

At first glance, Tyler has an extremely functionalist model of government growth: People always had a latent demand for big government; then technology finally made it possible to satisfy them.  But Tyler's model hardly implies that the public's latent demand for big government was wise or prudent.  If improved transportation leads to a large increase in consumption of cyanide, it hardly implies that cyanide is part of every nutritious breakfast.

I value papers that make noticeable progress on important questions.  If you share my preference, this could easily be Tyler's best paper ever.  At least so far; I still hope to see many more like it.  Read the whole thing.

What we’ve learned from the euro crisis, part I. Tyler Cowen

Matt Yglesias serves up a short and partial list, here are some of mine:

1. When the Germans say “no LOLR” they mean “no LOLR”!  Especially when they put it into print.  I already knew that, actually.

2. It is a disaster and a dead-end situation when a country uses its automatic stabilizers in a manner which supports rent-seeking and harms growth.  There is, in a time of crisis, no way out of the resulting trap.

3. The “regulation and labor law will come down really hard on larger firms” approach of Mediterranean Europe is far worse than we had thought, and we thought it was bad in the first place.  I can’t stress this point enough.  It’s cut those countries off from some major sources of growth and technical advance.

4. Don’t borrow in someone else’s currency.

5. Don’t think that “don’t borrow in someone else’s currency” is the only lesson.  Last I checked the Netherlands was doing OK.

6. International coordination doesn’t work very well unless the interests of the various countries are aligned in the first place.  If this is what becomes of the EU, what is our chance to save the world’s fish stocks?  Protect against global environmental problems?  etc.  The EU, and the eurozone, is designed for vague statements of consensus that, when faced with real problems, don’t get the job done.

7. We can suddenly imagine the so-called “first world” splitting into two parts, distinguished by the degree of conscientiousness applied to human capital formation.

8. The French-German marriage was never going to last that long anyway.  Yet without it, how do things get done in Europe?

9. The Mediterranean social welfare state model, based on lots of inefficient regulation, rent-seeking, reckless borrowing, and privilege within the local professions, is neither resilient nor robust.  It is wrong to blame “welfare states,” but it is also wrong to let “welfare states” off the hook altogether.  We’re learning a lot about how not all welfare states are created equal.

10. Don’t have government regulators let the banking system treat all government securities as riskless assets.

11. Hayek really was right about French rationalist constructivism (see chapter one).  I’m not sure there has been a better example in all of human history.

12. I’ll write more on Italy soon and what we can learn from the country in particular.  And I’ve left off some of the now-obvious, such as “no monetary union with a common fiscal authority and bank resolution mechanism,” etc.

From Marginal Revolution.

Steven Pinker on violence. Tyler Cowen

It is an important and thoughtful book, and I can recommend it to all readers of intelligent non-fiction, reviews are here  But I’m not convinced by the main thesis.

Might we run an econometrics test on regime changes?  The 17th century was much more violent than the preceding times, as was the early 19th century, albeit to a lesser extent.  Perhaps the distribution is well-described by “long periods of increasing peace, punctuated by large upward leaps of violence”, as was suggested by Lewis Richardson in his 1960 book on the statistics of violent conflict?  Imagine a warfare correlate to the Minsky Moment.  In the meantime, there will be evidence of various “great moderations,” though each ends with a bang.

Pinker does discuss these ideas in detail in chapter five, but at the end of that section I am not sure why I should embrace his account rather than that of Richardson.  I am reminded of the literature on the peso problem in finance.

Another hypothesis is to see modern violence as lower, especially in the private sphere, because the state is much more powerful.  Could this book have been titled The Nationalization of Violence?  But nationalization does not mean that violence goes away, especially at the most macro levels.  In a variant on my point above, one way of describing the observed trend is “less frequent violent outbursts, but more deadlier outbursts when they come.”  Both greater wealth (weapons are more destructive, and thus used less often, and there is a desire to preserve wealth) and the nationalization of violence point toward that pattern.  That would help explain why the two World Wars, Stalin, Chairman Mao, and the Holocaust, all came not so long ago, despite a (supposed) trend toward greater peacefulness.  Those are hard data points for Pinker to get around, no matter how he tries.

We now have a long period between major violent outbursts, but perhaps the next one will be a doozy.

How would this book sound if it were written in 1944?  Maybe there is a regime break at 1945 or so, with nuclear weapons deserving the credit for a relative extreme of postwar peace.  Pinker’s discussion of the nuclear question starts at p.268, but he underrates the power of nuclear weapons to reach the enemy leaders themselves and thus he does not convince me to dismiss the nuclear issue as central to the observed improvement, throw in Pax Americana if you like.

In one of the most original sections of the book (e.g., p.656), Pinker postulates the greater reach of reason, and the Flynn effect, working together, as moving people toward more peaceful attitudes.  He postulates a kind of moral Flynn effect, whereby our increasing ability to abstract ourselves from particulars, and think scientifically, helps us increasingly identify with the point of view of others, leading to a boost in applied empathy.  On p.661 there is an excellent mention of the wisdom of Garett Jones.  Pinker’s thesis implies the novel conclusion that those skilled on the Ravens test have an especially easy time thinking about ethics in the properly cosmopolitan terms; I toy with such an idea in my own Create Your Own Economy.

What is the alternative hypothesis to this moral Flynn Effect?  Given that the private returns to supporting violence are rare — most of the time — and violence has been nationalized, people will have incentives to invest in greater empathy and to build their self-images around such empathy.  This empathy will be real rather than feigned, but it also will be fragile rather than based in a real shift in cognitive and emotive faculties; see 1990s Mostar and Sarajevo or for that matter Nagasaki or British or Belgian colonialism.

When doing the statistics, one key issue is how to measure violence.  Pinker often favors “per capita” measures, but I am not so sure.  I might prefer a weighted average of per capita and “absolute quantity of violence” measures.  Killing six million Jews in the Holocaust is not, in my view, “half as violent” if global population is twice as high.  Once you toss in the absolute measures with the per capita measures, the long-term trends are not nearly as favorable as Pinker suggests.

Here is John Gray’s (excessively hostile) review of Pinker.  In my view this is very much a book worth reading and thinking about.  And I very much hope Pinker is right.  He has done everything possible to set my doubts to rest, but he has not (yet?) succeeded.  I find it easiest to think that the changes of the last sixty years are real when I ponder nuclear weapons.

Original post.

Source: Francisco Capella.

Brooks on Cowen on Stagnation by Don Boudreaux

Here’s a letter to the New York Times:

David Brooks appropriately devotes today’s column to my GMU Econ colleague Tyler Cowen’s important new book The Great Stagnation (“The Experience Economy,” Feb. 15). Mr. Brooks offers the intriguing hypothesis that what accounts for the relatively ‘stagnant’ measured economic growth since the mid-1970s isn’t so much the absence of remaining “low-hanging fruit” (as Tyler argues) but, instead, a shift to less-materialist values.

I have a different hypothesis: what has stagnated isn’t the economy but, rather, economists’ and statisticians’ capacity to measure economic activity and its contribution to human well-being.

As Mr. Brooks notes, Americans today demand more unique and nuanced experiences. Unfortunately, though, the economic value of experiences – unlike that of more corn, more cows, and more cars – is difficult to measure using mid-20th century national-income-accounting categories. But we are demanding these experiences not because we’re becoming less materialistic or less wealthy. We’re demanding these experiences precisely because, rather than stagnating, our economy and our wealth continue to grow so impressively that they are outstripping last-century’s economic categories and measurement techniques.

Sincerely,

Donald J. Boudreaux

Free Parking Comes at a Price by Tyler Cowen

IN our society, cars receive considerable attention and study — whether the subject is buying and selling them, the traffic congestion they cause or the dangerous things we do in them, like texting and talking on cellphones while driving. But we haven’t devoted nearly enough thought to how cars are usually deployed — namely, by sitting in parking spaces.

Is this a serious economic issue? In fact, it’s a classic tale of how subsidies, use restrictions, and price controls can steer an economy in wrong directions. Car owners may not want to hear this, but we have way too much free parking.

Higher charges for parking spaces would limit our trips by car. That would cut emissions, alleviate congestion and, as a side effect, improve land use. Donald C. Shoup, professor of urban planning at the University of California, Los Angeles, has made this idea a cause, as presented in his 733-page book, “The High Cost of Free Parking.”

Many suburbanites take free parking for granted, whether it’s in the lot of a big-box store or at home in the driveway. Yet the presence of so many parking spaces is an artifact of regulation and serves as a powerful subsidy to cars and car trips. Legally mandated parking lowers the market price of parking spaces, often to zero. Zoning and development restrictions often require a large number of parking spaces attached to a store or a smaller number of spaces attached to a house or apartment block.

If developers were allowed to face directly the high land costs of providing so much parking, the number of spaces would be a result of a careful economic calculation rather than a matter of satisfying a legal requirement. Parking would be scarcer, and more likely to have a price — or a higher one than it does now — and people would be more careful about when and where they drove.

The subsidies are largely invisible to drivers who park their cars — and thus free or cheap parking spaces feel like natural outcomes of the market, or perhaps even an entitlement. Yet the law is allocating this land rather than letting market prices adjudicate whether we need more parking, and whether that parking should be free. We end up overusing land for cars — and overusing cars too. You don’t have to hate sprawl, or automobiles, to want to stop subsidizing that way of life.

As Professor Shoup wrote, “Minimum parking requirements act like a fertility drug for cars.”

Under a more sensible policy, a parking space that is currently free could cost at least $100 a month — and maybe much more — in many American cities and suburbs. At the bottom end of that estimate, if a commuter drives to work 20 days a month, current parking policy offers a subsidy of $5 a day — which is more than the gas and wear-and-tear costs of many round-trip commutes. In essence, the parking subsidy outweighs many of the other costs of driving, including the gasoline tax.

In densely populated cities like New York, people are accustomed to paying high prices for parking, which has helped to encourage a relatively efficient, high-density use of space. Yet even New York is reluctant to enact the full social cost of the automobile into policy. Proposals to impose congestion fees have failed politically, and on-street parking is priced artificially low.

Manhattan streets are full of cars cruising around, looking for cheaper on-street parking, rather than pulling into a lot. The waste includes drivers’ lost time and the costs of running those engines. By contrast, San Francisco has just instituted a pioneering program to connect parking meter prices to supply and demand, with prices being adjusted, over time, within a general range of 25 cents to $6 an hour.

Another common practice in many cities is to restrict on-street parking to residents or to short-term parkers by imposing a limit of, say, two hours for transients. That makes parking artificially easy for residents and for people who are running quick errands. Higher fees and permit prices would help shore up the ailing budgets of local governments.

Many parking spaces are extremely valuable, even if that’s not reflected in current market prices. In fact, Professor Shoup estimates that many American parking spaces have a higher economic value than the cars sitting in them. For instance, after including construction and land costs, he measures the value of a Los Angeles parking space at over $31,000 — much more than the worth of many cars, especially when considering their rapid depreciation. If we don’t give away cars, why give away parking spaces?

Yet 99 percent of all automobile trips in the United States end in a free parking space, rather than a parking space with a market price. In his book, Professor Shoup estimated that the value of the free-parking subsidy to cars was at least $127 billion in 2002, and possibly much more.

PERHAPS most important, if we’re going to wean ourselves away from excess use of fossil fuels, we need to remove current subsidies to energy-unfriendly ways of life. Imposing a cap-and-trade system or a direct carbon tax doesn’t seem politically acceptable right now. But we can start on alternative paths that may take us far.

Imposing higher fees for parking may make further changes more palatable by helping to promote higher residential density and support for mass transit.

As Professor Shoup puts it: “Who pays for free parking? Everyone but the motorist.”

Tyler Cowen is a professor of economics at George Mason University.

Ebeling versus Cowen on Lachmann by Robert Wenzel

Tyler Cowen has found another reason to call for government intervention in the economy. He comes out in support of a German government program that subsidises companies to keep employees on the payroll. At Marginal Utility, he wrote:

Here is another factor behind the recent German economic success:

• A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis.

 There is much more of interest here. I would describe this as a major, still uninternalized lesson of the recent crisis, with its roller coaster-rapid dips. In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are "good" jobs in the first place. (Yes, people thought they knew this but it's an even stronger difference than had been believed.) The U.S. auto bailout, for instance, worked better than did most of the stimulus program. Most of the Austrians would disown this point, but you can pull it right out of Lachmann's Capital and its Structure.

Aside from the fact that such government subsidies can't do anything but distort the natural flow of employment in an economy, I also found curious Cowen's comment that Ludwig Lachmann was someone who held a view similar to his.

I asked Richard Ebeling, who has studied Lachmann intensively, to comment. Note Ebeling also knew Lachmann personally: In Political Economy, Public Policy and Monetary Economics, Ebeling writes:

Conversations with Ludwig Lachmann were always a great and challenging delight. I would enter his NYU office, and immediately after closing the door, he would say in his slightly gravelly and sing- song German accent, “Well, Mr.Ebeling, in these four walls we can speak our mind.” Soon we were lost in fascinating talk about the trials and tribulations of the economics profession, and its failure to successfully grapple with the dilemmas of radical uncertainty, kaleidic expectations, and disequilibrium dynamics.

Here's Ebeling on Cowen and Lachmann:

No, I would not agree with Tyler Cowen on his interpretation of Lachmann's position on supposedly the cost-minimization of keeping people employed in their current employment, rather than having to deal with reemploying them once they have lost their jobs.

A crucial element in Lachmann's view of capital (that he formulated in a number of articles and then in his book, "Capital and Its Structure,") is that the relationships between and among capital goods are those of substitutes and complements.

The Keynesian fallacy, Lachmann implies, is that Keynes tended to view and consider the capital stock has a more or less homogeneous aggregate under which all capital goods might be considered as interchangeable substitutes. Thus, any increase in capital investment lowers the "marginal efficiency of capital" (Keynes' term) of every other unit of capital, since every unit of capital is a substitute with all other capital.

But once we disaggregate the capital stock, i.e., investigate their more microeconomic interrelationships we realize that every specific capital good is brought into existence within the context of a capital investor's production plan. The capital good is expected to perform various productive "functions" in conjunction and in a complementary interdependency with already existing (or also being brought into existence) capital goods.

Each capital good fits within a time structure of production in a particular "stage" of the "orders " of production (along the lines that Carl Menger and Bohm-Bawerk formualated) from "higher order" stages of the production process to the "lower order" (closer to the consumption stage) of the production process.

Now labor, too, is not homogeneous and interchangeable. (To view it as so is to commit the "lump of labor" fallacy.) In an intensive capital using market economy, an inevitable complement is a growing specificity of skills and experience within the "labor supply." A medical doctor is not an interchangeable substitute for the knowledge skills of a lawyer, or an accountant, or an economics professor, or a computer programmer, or an auto mechanic, or an interior decorator, or a hair stylist, or . . .

As Hayek taught us long ago, the division of labor involves an inseparable division of specialized knowledge or various types.

Thus, if monetary manipulation brings about an increase in money and credit, and a resulting distortion of the rates of interest, and if this generates a tendency for misguided capital and related investments, and as a consequences capital goods and various types of labor are drawn into particular sectors of the economy and "stages" of the time structure of production, then . . .

Once the economy goes into a "correction" phase of the business cycle it is discovered that there has been a misallocation of the factors of production among those sectors and "production stages" of the market, which will require a reallocation of many of those specific capital goods and labor-skilled individuals into post-boom sustainable alternative employments.

In Lachmann's schema, this will require a revision of human plans -- including production plans. It is discovered that particular capital goods and specific "human capital" suppliers have been employed in complementary relationships that are unsustainable. These structures of physical and human capital have to be dissolved to some extent (or in some cases completely).

Each of these physical capital goods and specific-skilled workers will have to search out alternative ("substitute") production and investment plans into which they can now re-fit themselves in terms of another capital-complementarity production activity for which their production potentials and qualities would be appropriate.

In some cases, specific capital goods may be temporarily or even permanently "idle," in that their characteristics are not easily usable for alternative production plans.

With labor, some workers may discover that their skills are not easily adaptable for an alternative production plan, and they may have to "re-skill" themselves through re-training, etc. Or they may have to accept a lower rate of remuneration (given an alternative employer's anticipated lower estimate of the value of their marginal product compared to their previous employment). Or they may have to relocate geographically to find employment as a complementary factor of production in an alternative investment plan.

The knowledge and "re-coordination" problem in this process is that it is mostly impossible to know the answer to these necessary readjustments and adaptations other than allowing the individual actors in the market to search, explore, discover, and be "alert" to what the opportunities may or may not be in a post-boom competitive market environment (in terms of price and wage flexibility, resource mobility, etc.).

Government interventions and "stimulus" gimmicks merely serve to delay the adjustments and further distort an already distorted market. It is an attempt to maintain capital and labor complementary production and investment structures that are unsustainable in many of the patterns generated during the boom phase of the business cycle.

Understanding Ludwig Lachmann's insightful analysis of capital complementarity and substitutability, and its application to labor skills, reinforces why the Keynesian macro approach is inherently flawed. It only hides from view all the relevant microeconomic relationships that bind all consumption and production activities into one interdependent market process.