On Monday, Rep. Paul Ryan of Wisconsin, Ranking Republican on the House Budget Committee, and Arthur C. Brooks, president of the American Enterprise Institute, published an essay in the Wall Street Journal arguing that the electorate faces a choice between a free enterprise system and European-style social democracy. A number of thoughtful commentators, including columnist David Brooks of The New York Times, have taken exception to Ryan and Brooks, arguing that they ignore important aspects of the American tradition and that they fail to give due regard to the value of an energetic and effective government.
Drawing on what he’s called the Hamiltonian tradition, David Brooks makes the case for pragmatic interventions to broaden access to opportunity:
Republicans are right to oppose the current concentration of power in Washington. But once that is halted, America faces a series of problems that can’t be addressed simply by getting government out of the way.
The social fabric is fraying. Human capital is being squandered. Society is segmenting. The labor markets are ill. Wages are lagging. Inequality is increasing. The nation is overconsuming and underinnovating. China and India are surging. Not all of these challenges can be addressed by the spontaneous healing powers of the market.
It’s not clear, however, that David Brooks’s vision can’t be reconciled with that of Ryan and Brooks, both of whom emphasize that they are talking about the aspirations of policymakers and citizens:
What we must choose is our aspiration, not whether we want to zero out the state. Nobody wants to privatize the Army or take away Grandma’s Social Security check. Even Friedrich Hayek in his famous book, “The Road to Serfdom,” reminded us that the state has legitimate—and critical—functions, from rectifying market failures to securing some minimum standard of living.
However, finding the right level of government for Americans is simply impossible unless we decide which ideal we prefer: a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state. Most Americans believe in assisting those temporarily down on their luck and those who cannot help themselves, as well as a public-private system of pensions for a secure retirement. But a clear majority believes that income redistribution and government care should be the exception and not the rule.
David Brooks is concerned about the danger of oversimplification, and of effacing the good and valuable work done by government in education, infrastructure, and other domains. Ryan and Brooks, in contrast, worry that we’re failing to see the ways in which dozens of discrete policy interventions add up to an expansion of the spending burden and the regulatory burden that threatens to stymie private initiative.
Why not lift the safety net a few rungs higher up the income ladder? Go ahead, slap a little tariff on some Chinese goods in the name of protecting a favored industry. More generous pensions for teachers? Hey, it’s only a few million tax dollars—and think of the kids, after all.
Individually, these things might sound fine. Multiply them and add them all up, though, and you have a system that most Americans manifestly oppose—one that creates a crushing burden of debt and teaches our children and grandchildren that government is the solution to all our problems.
Indeed, many of the challenges that David Brooks cites derive at least in part from the failures of dysfunctional, and expensive, public monopolies. Ryan and Brooks are aiming to tilt the cultural playing-field in favor of those who fret about their steady expansion.
One of the central problems with Ryan and Brooks, in my view, is that they neglect to mention that many European democracies actually impose a lighter regulatory burden on their citizens, as the World Economic Forum’s Global Competitiveness Report makes vividly clear. And a handful of European countries, Switzerland foremost among them, have tax systems that are more conducive to investment and growth. Pro-market conservatives are often derided for their Europhobia, yet there is much the United States can learn from labor market reform in Germany and the Netherlands, pension and educational reform in Sweden, health insurance reform in Switzerland, congestion pricing in Norway, to name just a few examples. A number of northern European countries, including Denmark and Ireland, have freer markets than the United States. The main advantage we have over most European economies is a somewhat lower tax burden.
Yet there is much we can do to make the composition of taxes more conducive to growth without actually lowering taxes overall, as desirable as the latter goal might be. That is another lesson from the European experience. Scott Sumner, the economist and blogger, has written an excellent post on the virtues of various economic models, drawing on data from the Heritage Index of Economic Freedom. One of his observations is that the size of the United States actually undermines the efficacy of our government in important respects:
This list also highlights the “small is beautiful” point I keep making. The top six countries all have fewer people than Los Angeles County. I’m guessing they don’t spend $550 million dollars on new high schools (as LA just did.) The Economist noted that America is spending $11 billion on its census ($36 per person) whereas Finland spends a measly $1.2 million (20 cents per person.) It’s no surprise that the bigger countries fell sharply down the rankings, as soon as bogus categories like market size and “sophistication” were removed. Huge size didn’t hurt us much in the US as long as we were a fairly small and laissez-faire government. But as our government gets increasingly active (think health care) the large size and diversity of the US becomes an increasing drawback. What works in Minnesota doesn’t work in McAllen, Texas.
This raises the question of why the United States has nevertheless proven so economically successful:
So why has the US been so successful? Because good governance isn’t everything; it turns out small government also helps a lot. The early studies of the supply-side effects of high taxes (Lindsey, Feldstein, etc) showed the effect was powerful. Revisionist studies by Slemrod, Saez, Goolsbee, etc, suggested the effects were rather small. But I didn’t find the methodology of either group of studies to be at all convincing, as they measure immediate effects, whereas the important effects probably occur very gradually. This is especially true of human and physical capital formation, which is slowed by high MTRs. Imagine a scenario where people are only willing to put in the hard work of becoming a doctor if the pay is twice as high as other professionals—say $200,000 instead of $100,000. If you put a 50% tax on income above $100,000, fewer people will go to medical school until salaries rise to $300,000. Note that patients pay 100% of that tax in higher prices. (So much for all those articles on distributional effects of taxes. That’s right, they are all worthless.) But the effect doesn’t occur immediately. It takes a long time to study medicine, and the cost is sunk once the courses are completed. The tax probably won’t stop people who are already doctors from continuing to practice.
These insights suggest that cross-sectional tests of the sort Ed Prescott did are best. And those suggest a strong Laffer curve effect. Despite much higher tax rates, most European countries raise about the same amount of revenue as the US does (in PPP terms.)
If you accept Sumner’s framework, which resembles the argument made by Arpit Gupta in his Economics 21 column on “The Consequences of Taxation,” it’s clear that restraining the tax burden is important to future economic success. And this means that spending discipline is vitally important.
One common concern is that spending discipline is incompatible with the kind of effective and energetic government that David Brooks would like to see. But there is good reason to believe that the opposite is true, and that spending discipline begets the organizational discipline that leads to higher-quality, more effective public services. In Stretching the School Dollar, a new Harvard Education Press volume co-edited by Rick Hess and Eric Osberg, a number of educators and administrators identify strategies that will both reduce the overall cost of public education while also increasing student achievement. Practices that flourished during periods of robust revenue growth often placed little emphasis on value for money. The absence of a profit motive reduces the pressure to identify efficiencies, particularly when property or sales tax increases are an available alternative to taking difficult steps. The same dynamic is at work in medical care and defense spending, to name two particularly pressing examples.
One final argument against Ryan and Brooks, which Brink Lindsey of the Kauffman Foundation raised in a decidedly unfavorable review of Arthur C. Brooks book The Battle published in The American Prospect, is that they are wrong to present the case for free enterprise as an essentially cultural struggle:
On the vexing question of how to defuse the entitlements fiscal time bomb, there is no “us” and “them.” The politics of us versus them is almost always ugly and illiberal. And on the policy questions that Brooks is concerned with, there’s no need for such deliberate divisiveness. Yes, there are strong disagreements about market regulation and the proper size and scope of social spending, but these disagreements are not based on some irreconcilable differences in values. Vigorous support for continued economic growth is nearly universal across the political spectrum. How else will we put jobless Americans back to work, and how else will we pay for the activities of government, without a strong, dynamic private sector? A similarly broad consensus exists for the following two propositions: On the one hand, a government safety net is needed to protect Americans from various hazards of life; on the other hand, that safety net shouldn’t bankrupt us.
I tend to think Lindsey is right to suggest that there is a danger in making polemical arguments about the future of the welfare state. They tend to coarsen the discourse, and they turn potential allies into enemies. Yet I also think that there is something to the cultural argument that Ryan and Brooks advance.
In a paper on “Corruption, Inequality,and Fairness,” economists Alberto Alesina and George-Marios Angeletos offer a useful framework for thinking about how the size of government impacts normative understandings of the appropriate role of government:
Bigger governments raise the possibilities for corruption; more corruption may in turn raise the support for redistributive policies that intend to correct the inequality and injustice generated by corruption. We formalize these insights in a simple dynamic model. A positive feedback from past to current levels of taxation and corruption arises either when wealth originating in corruption and rent seeking is considered unfair, or when the ability to engage in corruption is unevenly distributed in the population. This feedback introduces persistence in the size of the government and the levels of corruption and inequality. Multiple steady states exist in some cases.
Suffice it to say, Alesina and Angeletos are offering a stylized model and not a rigorous empirical account. Yet it is this basic idea that underlies Rep. Ryan’s insistence that conservatives embrace positions that are “pro-market, not pro-business,” as Luigi Zingales of the Booth School has recommended. Politics is not always about highly technical debates concerning progressive price indexing. It is often about shaping our shared normative understandings, and, as Ryan and Brooks argue in their Wall Street Journal essay, our shared aspirations for the kind of society we’d like to live in. And on those grounds, at least, Ryan and Brooks are offering an attractive alternative to a society that looks first to the federal government to solve problems.