Liberals too easily subscribe to a basic precept of conservatism: that where it concerns government, smaller is better. But empirically, this position is (as) unsupportable (as most other conservative idiocies).

In 1900, total US govt spending (fed + state + local) was about 8% of GDP. Spending stayed above 10% of GDP between WW1 and FDR, passed 20% during the New Deal, spiked during WW2, then settled back to about 22% in the late 1940s. It’s climbed steadily ever since, briefly passing 40% in the aftermath of the Great Recession, having since fallen back to the high 30s.

As a function of GDP, US government spending since WW2 has been triple to quadruple what it was during 19th century. If indeed government spending was inimical to economic growth, one would expect to see a massive slowdown in GDP growth. One in fact sees the opposite: the golden age of American economic growth coincides with (by far) the largest government America’s ever seen.

Looking at per capita GDP growth since 1790, one finds that the best 50 yr period for growth before WW2 was 1842-1892, during which per cap GDP increased about 180%. But since WW2, 50 yr growth rates have almost always been higher, and usually much higher: more than 200% for 50 yr periods ending during 1997-2000, and more than 190% during such periods ending during 2004-2008. Even with the great recession, 50 yr per cap GDP growth only slipped to about 175%. And it’s worth noting that 50yr growth for the period 1843-1893 is only 153% (with the Panic of 1893).

100 year growth rates tell a similar story. During 1910-2010, US per cap GDP increased by about 650% – the intervals 1900-2000, 1901-2001, 1902-2002, on up to present all have growth of between 600 and 710%. By comparison, pre-WW2 100 yr growth never even reaches 400%, and is usually closer to 300%.

The story is told and retold the world over: since WW2, fast economic growth does not happen in the absence of a large govt directing resources to critical industries (viz., health, education, insurance). To judge whether a government is large, I like to use a simple pair of metrics: how much does a government tax and-or spend as a function of GDP; shaded by one particular fact: to what extent does government directly own and control the means of production.

Practically every rich country in the world taxes and spends more than 30% of GDP – some of the richest countries are in the 50-55% range. The notable exceptions are Singapore and Taiwan, rich countries whose respective govts only spend about 17-19% of GDP – but those governments have massive direct ownership and control of economic production.

Taiwan’s economic miracle (1952-82) SLOWED considerably after its government sold off a large fraction of its stake in firms and banks. Even today, Taiwan’s govt can balance its budget while spending 18% of GDP and taxing only 13%, with the difference coming via (non-tax) revenue in state-operated firms. (Kuwait’s govt is a useful illustration: taxing 1% of GDP while spending 30%, without running a deficit.)

Singapore’s state-owned and operated holding company, “Temasek Holdings”, has assets worth about 50% of Singaporean GDP. This wd be like a US govt agency owning $8T of (mostly) US corporate and banking stock, making buying and selling decisions politically – pouring capital into favored industries and firms. You may recall how central bankers recoiled at the idea of moving the SS trust fund (about $3T) into corporate stock – they feared the politicization of investment decisions. Just how ginormous is an $8T portfolio? To get to that value, the US govt wd have to own 50% of all the stock traded on the NYSE. In Singapore, that’s the way “business” is done.

Today, every country with a small government is poor, and every rich country has a large government. The chicken and egg question cannot be seriously entertained. If small government is so awesome for economic growth, why are there no small-government economic powerhouses? Why havent big-government states in the west withered – why has growth only accelerated since WW2, with the rise of big govt?

My best guess (ok: WAG) is that up to a certain point in development, an economy does just fine letting the market allocate the bulk of resources. But beyond that point, market failures in key areas undermine the larger economy, and growth is greatly enhanced by govt diverting resources (thru tax/spend policies) into those areas. Up till 1900, the government didnt do very much beyond defense. Since then, govt is the prime spender in education, insurance and health.

Few question the usefulness of public education – differences are usually about how the state should spend on education (vouchers, busing, etc) – not whether it should. Five year olds cant go to the bank to borrow for their education; their parents do not come close to enjoying the full returns on their investment in their children’s education – and thus it is that access to capital and externalities destroy what mt otherwise be a functioning private market for education. Worldwide, education simply does not happen in the absence of massive government spending, no matter the returns to education.

The benefits of govt spending on Health, writ large, are also intuitive. 19th century workers just werent worth a whole lot – when one got sick, it was (to be crass) not cost-effective to treat them – not that medical technology at the time cd do much. However it was cost-effective to prevent disease – especially the contagious kind – and countries who wd become rich got into building sewer systems, greatly reducing the toll of infectious disease. (The WHO, operating significantly in the developing world, still considers sanitation as part of a nation’s healthcare budget.)

As people get more valuable (ie, as they accumulate more human capital), their sickness and death becomes more costly, and treatment makes economic sense. As proof of the usefulness of govt provision of health insurance, one notes the developed country in which the govt is LEAST involved in health expenditures, has both the highest health costs AND the highest mortality rates (from birth to age 75). Reasonable minds can differ as to why the private market for healthcare fails by itself – but the starting point is the fact that it fails spectacularly.

The last primary area of big government spending is insurance, and this is the trickiest case to consider. Modern states spend a fortune on health and old age insurance, considerable sums in many other areas of insurance (unemployment, welfare, disability, depositors), while heavily regulating practically every insurance that they dont directly provide (homeowners, auto, earthquake, etc.). The threshold question is itself challenging: how does insurance create value by reallocating risk? Perhaps insurance is only a facilitator of growth, permitting greater risk-taking. Any look at the financial services sector shows the modern human desire for insurance is insatiable. This line of inquiry will be be continued….

As that wrinkly bad-hair dude said: greed is good. But big govt is also good, and liberals should not be shy about it. it should not go without saying that markets remain an indispensable tool for resource allocation – attempts to operate without them, in Russia, China and Cuba, all met with economic disaster. But the medium between Maoist China and present-day Burma – is indeed happy. In the developed world, bigger is better: With their biggest-in-class governments, Scandinavian growth rates (per cap GDP) have outstripped the anglo world (US, UK, Canada, NZ, Australia) since WW2.

refs:

per cap us gdp growth courtesy of: http://www.measuringworth.com/index.php

us govt spending: http://www.usgovernmentspending.com/

http://en.wikipedia.org/wiki/Government_spending#As_a_percentage_of_GDP

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita

other fun stuff:

http://en.wikipedia.org/wiki/Temasek_Holdings

http://en.wikipedia.org/wiki/Taiwan_Miracle

Few Americans can name the decade when poverty in the under-65 population bottomed out. That wd be the 70s. The 70s arent remembered as being an especially good decade for the US economy: the oil crisis, a double-dip recession, inflation, price controls. Not a good time. But Americans were less likely to be poor during this decade than any other, before or since.

What was special about the 70s was AFDC and Food Stamps peaked in their combined generosity. AFDC (now TANF) has only seen benefits erode for the past 35 years.

The closest that poverty in the under-65 population came to 70s levels was at the end of the Clinton boom, when unemployment sank to 4%. But not even that was enough. Among 18-65s, poverty during the 70s never exceeded 9.3% – it has only ever been higher. Among children, poverty in the 70s was in the range of 14-17%. Ever since it’s generally been over 20% – though at the end of the Clinton boom it got under 17% for 3 years (2000-02).

To understand the effectiveness of fighting poverty with government programs (as opposed to relying on market outcomes) it helps to look at poverty in the over-65 population. While under-65 poverty has risen enormously since the 70s, among the elderly, poverty has dropped steadily: from 25% to 9%, close to its lowest level ever. The difference is social security, whose benefits have been maintained (unlike AFDC/TANF/Food Stamps/SNAP). There’s a working paper at the NBER showing that Social Security reduces elderly poverty by 17 percentage points. In other words, but for Social Security, poverty among the elderly would also have increased since the 1970s, as it has for everyone else.

And there you have it: the radically different experience of the under- and over-65 populations show convincingly that government programs can be an excellent tool for reducing poverty.

Looking outside the US, one only finds more evidence of the effectiveness of government programs. For 2010, OECD (which uses different poverty measures than the US) has US poverty at 17% – higher than every other OECD country except Mexico, Israel, Turkey and Chile. US poverty rates are double that of most of Europe – even poverty in Spain and Greece is lower than in the US! Remarkably, poverty is lower in many European countries with median incomes half that of what they are in the US. (Estonia, Portugal and Poland, e.g.). Slovakia and the Czech Rep. are the most extreme cases: median income and poverty are both approximately 1/3 of US levels. Not coincidentally, most of Europe spends 50-100% more than the US (as a function of GDP) on social welfare.

Addressing poverty – particularly child poverty – isnt primarily about social justice or humanitarianism. People deprived of a modicum of material resources tend to be less healthy and productive. Poverty correlates with practically every social ill you can name: crime, drug abuse, alcoholism, teen pregnancy. And the US suffers especially from low social mobility: Compared to children in other countries, poor American children are more likely to remain poor all their lives.

Because we all benefit from being part of an informed, productive polity, we should all be willing to pay more in taxes, with a reasonable expectation that we will all come out ahead in the bargain, as incomes rise for all, social ills abate, and democracy improves.

Refs:

AFDC benefits over time:

http://aspe.hhs.gov/hsp/indicators04/apa-tanf.htm

http://aspe.hhs.gov/daltcp/reports/1995/rn13.htm

NBER paper on social security and elderly poverty:

http://www.nber.org/papers/w10466

Poverty data:

http://www.census.gov/hhes/www/poverty/data/historical/hstpov2.xls

http://www.census.gov/hhes/www/poverty/data/historical/hstpov3.xls

http://stats.oecd.org/Index.aspx?DataSetCode=IDD

worth reading:

http://www.cbpp.org/cms/?fa=view&id=3997

Hey what up with the high cost of higher education? As it turns out, the wage premium for a college degree is higher than its been since the 1920s – and so students quite rationally are willing to pay a fortune in tuition. That wage premium also has driven up hiring/retention costs for PhDs.

America used to lead the world in HS and college grad rates. While college attendance is still high, grad rates have slipped, and the drop-out rate is significantly attributable to financial barriers. The labor market gives every indication of being starved for educated workers – yet the market has not responded by increasing the relevant labor supply. This market failure is fueling wage inequality – America is now producing too many low-skill workers and not enough high-skill workers.

The longstanding remedy for underinvestment in education markets is public provision of education. As America made a big push at the beginning of the 20th century toward universal HS ed (raising grad rates from 5 to 50% in a few decades), it should today make a comparable push for universal college. Following the lesson of what worked previously, community colleges should be free – every American HS grad should have the opportunity to attend college for free. If this proves inadequate, a stipend system should be effected, allowing college students in good standing to draw a small salary.

At the other end, recent evidence on the value of Head Start and pre-K shows that we should also invest in early childhood education – for the purpose of producing more HS and college grads. Quality full-time pre-K should be universal and free – though I’d wait a decade or two to see the empirics before asserting it should also be mandatory.

To grasp the depth of the problem – consider that native-born American men born in 1948 are, to date, the most educated cohort in American history. American men born after 1948 have fewer years of education! American HS grad rates, pathetically, peaked in 1969 at about 70% and declined for more than 30 yrs, until the Great Recession made working so unattractive that kids finally started staying in school again – but HS grad rates are still below what they were 45 years ago!

Large scale education has simply never happened anywhere, anytime, in the absence of massive public subsidies. 5 year olds are unable to go to their local bank to take out loans for their education – this rather banal observation perhaps best captures one of the central problems in the education market: future workers lack the necessary information or access to credit to make efficient investment decisions. The second major problem are externalities. Students and their parents – who foot the bill for higher education – do not capture the full returns to their investment. Educated people make better citizens, are healthier, cause less crime, pay more in taxes, etc. In order for the market to allocate resources efficiently, these externalities must be offset – by collecting taxes from the general population (who benefit from other peoples’ education) and investing in education.

That this is sound policy for K-12 is beyond debate – liberals and conservatives will bicker over the form that public ed should take (vouchers, busing, affirmative action, etc) – but there is consensus that its a good thing in the general sense. Extending this policy to pre-K and post-12 should also be a no-brainer. 100 years have passed since America made HS free to all. The time has come to do the same for college and pre-K.