As we continue to examine the outcomes of socioeconomic initiatives throughout our history, it becomes apparent that society’s benefits are not necessarily derived from good policies as much as from the absence of bad ones.
– Robert Nelson
“More importantly, if you care about improving the quality of life and living standards over time, the essential question is always about creating broad-based, sustainable economic growth. What are the conditions that are most likely to help the economy get bigger, stronger, and more resilient? At the top of the list is a government which promulgates simple, predictable, and widely enforced rules; spends within its limits and doesn’t pursue arbitrary trade wars and military interventions; and doesn’t bog down the future with an ever-increasing mountain of debt that tamps down growth and freezes out investment. Near the bottom of the list is something that is part of Sanders’ policy repertoire: Announcing bold new plans (Medicare for All! Free College for All!) without even pretending to know how to pay for them.“
The Political Dogma:
Government social “reinvestment” programs benefit the poor at the expense of the wealthy.
The Political Reality, as instantiated by Director’s Law:
Public program expenditures primarily benefit the upward rising middle classs at the expense of the wealthy AND the poor.
Counter-intuitively, the less trusting of government we become, the more likely we are to call for more regulation by that same government. “When individuals distrust others, they prefer government officials to regulate and control, even when they know that these officials themselves cannot be trusted,” observed Philippe Aghion, Yann Algan, Pierre Cahuc, and Andrei Shleifer in the aforementioned Quarterly Journal of Economics article.
Their paper drew on the World Values Survey, which has collected data from 50 countries for decades. One example they cite involves relative levels of regulation on starting new businesses. “High-trusting countries such as Nordic and Anglo-Saxon countries impose very few controls on opening a business,” they write, “whereas low-trusting countries, typically Mediterranean, Latin-American, and African countries, impose heavy regulations.” A similar pattern occurs when it comes to setting wages. Residents of low-trust Russia, Slovenia, East Germany, and Bulgaria “exhibit[ed] the strongest support for government control of wages. Approximately 92% of Russians and 82% of East Germans favor wage control. Respondents in Mediterranean countries also strongly favor wage control by the state: 78% of the Spaniards and 60% of the French agree” that the government should control wages. Meanwhile, “in Anglo-Saxon and Nordic countries, less than half the population agree.…Similar patterns obtain for the support of government control of prices.”
But why do people in low-trust countries turn for protection to governments they know are at best incompetent and at worst corrupt? I talked about this dynamic with one of the paper’s co-authors, Andrei Shleifer, who grew up in the old Soviet Union, moved to the United States as a teenager in the mid-1970s, and now teaches economics at Harvard.
When people perceive that their world is out of control and unpredictable, Shleifer says, they want order to be restored—the faster the better. “They want regulation. They want a dictator who will bring back order.” Often, he adds, the rules and restrictions create a negative feedback loop. In response to loss of trust, governments set up new regulations that make it harder to start businesses. Those policies tend to lead to fewer businesses and less employment, which in turn leads to slower economic growth, which leads to calls for more redistribution and yet more regulation.
Weak or nonexistent economic growth is the deep background for the loss of trust throughout society, according to the George Mason University economist Alex Tabarrok. Like Shleifer, Tabarrok is an immigrant, in his case from Canada. Up through the early ’70s, he explains, annual economic growth averaged about 3 percent a year in the United States. Since then, it has become both more volatile and weaker overall. For most of the 21st century, it has averaged around 2 percent. “When everyone is getting wealthier and the economy is humming along and things are improving, it’s easier to trust other people,” Tabarrok says. “If the economic pie is relatively fixed, you distrust other people more because you know the only way someone can get ahead is by screwing you and vice versa.”
Then there’s the populist rhetoric, coming from politicians as different as Donald Trump and Bernie Sanders, that accuses American leaders of selling out their own citizens while furthering the interests of the European Union, Russia, China, and other foreign powers. The idea that “the system is rigged” is far more widely represented in retail politics than it was a few decades ago. That’s both a cause and an effect of the loss of confidence in government. Shleifer stresses that while things in the aggregate are getting better—for virtually everyone in the United States, the standard of living keeps ticking up—the situation is “more volatile.” You don’t get a job until later in life, he says, and when you do, it seems less secure than the one that your parents or grandparents had.
Shleifer points to the economic expansion that has been underway since 2009. “This economy has bounced back tremendously from the Great Recession and much faster than Japan or Europe,” he says. Yet there’s still a widespread perception among many people that getting and keeping a job are beyond their control. That palpable lack of agency orients people to push for government intervention.
Moreover, I will point out that higher taxes most likely will simply trigger and enable additional spending. And I will warn that tax increases will undermine economic performance.
Regarding that last point, three professors, led by Alberto Alesina at Harvard, have unveiled some new research looking at the economic impact of expenditure-based austerity compared to tax-based austerity.
Lessons from the data: Those peoples that trust their government, tend to have more economic liberty, which generally keeps gov’t size and power in check.