Economic Theory

Is making the case for smaller government pointless?


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Economic Theory
As countries get richer, the demand for government (particularly fiscal transfers) rises. That in essence is the key message of Will Wilkinson’s October blog that stimulated debate amongst free-market think-tanks. Analysing this ‘law’, Wilkinson challenges the conception that this trend can be fundamentally reversed through education or developing ‘the right policies’, or indeed political strategies such as ‘starving the beast’. Instead, he says, libertarians should accept the demand for a relatively large government as a fact of life, and perhaps concentrate more on how to make government provision more efficient, and prioritise reforms to the regulatory state.

Wilkinson’s blog is depressing and challenging for those of us who believe in the virtues of smaller government and civil society alternatives to state welfare. And he’s surely right on much. Most obviously, there really does seem to be a floor of government spending at around 35 per cent of GDP below which it is both difficult and very politically painful to keep spending for a sustained period of time.

I’ve long thought some libertarians’ focus purely on the ‘size of the state’ as a general variable to be engineered downwards has been a faulty strategy, not least because without an agenda that actually challenges hearts and minds on untouchable areas, government size simply cannot be reduced beyond a certain amount (indeed, that is one reason why we started ‘The Paragon Initiative’). Clearly, the scope of government (as well as its size) matters.

It’s surely true too that primary focus on the size of the state and tax and spending as key aims can distract us from the low hanging fruit of regulatory reform. The biggest UK economic challenge (in my view) is land use planning policy and its associated effects on the housing market, commercial property, labour mobility, and macroeconomic stability. The returns to focusing on areas such as this seem much greater than the economic benefits that could be achieved by reviewing the size of small government departments.

And yet, having acknowledged all that, I think Wilkinson overplays these observations and is too quick to abandon the hope of significantly smaller government.

The first point is to observe that there are still large differences in the overall size of government across western states. Korea, Switzerland and Australia have government spending levels at or below 35 per cent of GDP; France and Finland have spending at around 55 per cent. In short, across countries there seems to be a large proportion of government spending ‘up for grabs’, notwithstanding that the overall floor of spending appears to have been rising across most countries as income goes up. Wilkinson’s point that some small government countries can be economically illiberal in other ways is well-made, but a focus purely on state regulation which ignored the potential for removing government spending activities could cede far too much ground.

Indeed, Wilkinson presents no counter-factual for what might have happened to the size of government had there been no voices and advocacy extolling the virtues of smaller government. It is self-evident that the US, for example, has a stronger history of more resistance to state transfers than, say, France. Were all classical liberals and libertarians simply not to make the case for small government overall, then would US government look a bit more French? In the UK, would we not have even have seen the fall in government spending relative to GDP in the Thatcher period or here since 2010 without the classical liberal-influenced small government policy work? Might it have been the case that we would have seen even higher welfare spending or even greater inter-generational liabilities than already observed? If the IEA, ASI and CPS had never existed in the UK, would government be bigger right now?

We can argue about magnitudes, but the answer is surely ‘yes’. And clearly in the UK case politics does matter: major reductions in the size of the state as a proportion of GDP have been seen under two periods of Conservative government. Whilst the degree of emphasis could change, I do not see why free-market types can’t walk and chew gum on state size and the regulatory state at the same time, and think that there is much that politics can influence.

The main lesson from Wilkinson’s blog appears to me to instead be a more limited one: that talking about the virtues of small government, highlighting of long-term fiscal challenges, and even attempts to constrain government growth through politics fail when it comes to transfer growth. But rather than simply say ‘there’s nothing we can do about that’ and let’s manage it better, it might be that this type of spending requires a different approach.

Peter Lindert’s work seems to suggest that popular demand for state spending on transfers comes when a critical proportion of the population start to be aged 60+ and when there is a large movement of women of childbearing age into the labour market. Even in the supposed period of ‘austerity’, for example, we have seen the state’s role grow in areas such as social care and childcare which affect these groups. The overriding relationship between these two is that they represent a shift of responsibility and social functions away from households and to the state – which explains the paradox of welfare state growth in line with a perceived individualist social ethos.

The policy conclusion of this (presuming smaller government is an aim) might be uncomfortable for some libertarians. But maybe, just maybe, an overt strategy to strengthen households as an alternative to state provision might actually be a means of reducing the size of overall government. This, of course, is something that could unite libertarians with more traditional conservatives.

Another means of ‘reducing demand for government’ approach could seek to circumnavigate politics entirely. Rather than focusing energies on the policy process, libertarians could take more of an interest in the growth of market and voluntary institutions directly – in turn creating a reverse crowding out effect. Most obviously, this could occur in health and education. This is easier said than done, of course, particularly with regulatory restrictions. But the beauty of Wilkinson’s call for more focus on the regulatory state opens up precisely these opportunities for growing markets and civil society. We simply cannot assess whether a strategy of crowding out government could work without fostering the conditions which would allow it to be tried.

Wilkinson’s blog raises some interesting questions about the failures of libertarians’ emphasis on small government and their strategies to achieve it. But whilst his call for greater focus on the regulatory state and scope of government is surely right, his call to give up on making the case for the macro virtues of small government and to abandon the goal of attempting to shift welfare back to market and voluntary institutions seems to me a surrender too far.

 

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.


4 thoughts on “Is making the case for smaller government pointless?”

  1. Posted 12/12/2016 at 15:38 | Permalink

    Given that countries fiscal shape is better when government is smaller- would you agree that Labour’s massive spending during the Blair years makes it harder for the UK to enforce fiscal discipline (spending cuts- as the economy is more ‘dependent’ on GS).

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  2. Posted 12/12/2016 at 21:32 | Permalink

    There is no need to give ground in our efforts to reduce the size of the state and at the same time we need to be equally active and alert to take on the Regulation Nation as advised by Will Wilkinson. The scale of regulation in modern times is astounding and debilitating. Maybe turning the tide in the climate debate can pave the way for a bonfire of red and green tape.

    As an amusing aside, Will is the author of one of the most fatuous criticisms of Karl Popper on the record. For an antidote to his nonsense on that topic https://www.amazon.com/s/ref=nb_sb_noss_1?url=search-alias%3Daps&field-keywords=rafe+champion

  3. Posted 13/12/2016 at 10:16 | Permalink

    The referenced article by Will Wilkinson quotes Wagner’s Law: “[A]s an economy’s per capita output grows larger over time, government spending consumes a larger share of that output.”

    Much is made of this in the IEA article and referenced book. I fear though that, as for all correlation justifications, Wagner’s Law may be ephemeral: just a growth of expenditure with time; mistakenly justified by it ‘causing’ growth of prosperity (actually also just caused by ongoing time-related economic and other activity).

    Also, it would be interesting to investigate a new possible law that shows the correlation between government spending as a proportion of GDP and something else. That something else being the factor by which direct and indirect wages per MP/congressman/senator/government minister etc (including all supported expenses and personal staff) exceeds GDP per capita.

    If as I suspect, there is positive correlation, we would have another potential cause for increasing government expenditure: with culinary nicknames including the words gravy and honey.

    Then there is, of course, that issue with representative democracy as we currently (and mostly) do it. The big problem that, as pointed out long ago (and variously attributed, perhaps both incorrectly, to Alexis de Tocqueville and to Alexander Fraser Tytler): “A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.”

    Actually, IMHO, democracy goes on existing past this stage: with gradual though perhaps accelerating decline of the sort we have been experiencing for a century or so. Eventually we might try to fix this without throwing baby democracy out with the social democratic/communist/fascist bathwater. Say with bicameral parliaments where one house is elected by equal (existential) franchise and one house by votes in proportion to tax paid by each elector (house of taxpayers).

    So many possible causes; so much to investigate!

    Best regards

  4. Posted 14/12/2016 at 01:01 | Permalink

    Injustice breeds injustice.

    Without the correct framework of property rights, a large and overweening State apparatus becomes inevitable in order to mitigate the ill effects.

    I would therefore suggest that faux-libertarians take a look in the mirror it they want to know why people still find Socialism an attractive alternative.

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