The Economist - UK (2021-11-20)

24 Briefing Government spending TheEconomistNovember20th 2021

hear  that,  from  1948  to  1984,  the  British

state ran its own chain of hotels, that is be­

cause the “neoliberal” outlook on the prop­

er place of government has triumphed. 

Yet in other areas today’s governments

have  more  power  than  ever.  Building

things  requires  developers  to  jump

through  more  environmental,  conserva­

tion  and  local­opposition  hoops  than  it

used  to.  Health­and­safety  laws  have  pro­

liferated.  Occupational  licensing  has

grown  dramatically  across  Europe  and

North America. 

For decades unions in many rich coun­

tries  successfully  argued  against  govern­

ment­imposed  minimum  wages,  saying

they  would  do  a  better  job  of  raising  pay

themselves. But as they have withered, the

government  has  stepped  in  to  provide

wage  floors.  Rules  relating  to  other  work­

place  matters  such  as  parental  leave  and

gender­pay gaps go in only one direction. 

And if direct government control of the

economy has weakened, it has been more

than replaced by redistribution. The objec­

tive  correlative  of  Mr  Clinton’s  claim  that

the  era  of  big  government  was  over  took

the form of tax credits; he tripled those for

low earners with children, and introduced

the universal credit for children that Mr Bi­

den now wishes to expand. In 1979 the bot­

tom  fifth  of  American  earners  received

means­tested  transfers  worth  on  average

32%  of  their  pre­tax  income,  according  to

the  Congressional  Budget  Office.  By  2018

the figure was 68%.Total social­protection

spending  in  the  oecd—comprising  cash

benefits, direct in­kind provision of goods

and  services,  and  “tax  breaks  with  social

purposes”—grew  from  15%  of  gdpin  1980

to 20% in 2019.

Three  forces  stand  out  as  driving  the

trend:  the  incentives  which  bureaucrats

and politicians face; the rising costs of ser­

vices provided by the government; and the

demands of voters. 

Governments  and  bureaucrats  are  at

least partly self­interested: “public­choice

theory”  says  that  unrestrained  bureaucra­

cies  will  defend  their  turf  and  seek  to  ex­

pand  it.  A  good  recent  example  would  be

central  banks.  Their  mandates  typically

compel  them  to  control  inflation  and  see

off  bank  runs.  Yet  in  recent  years,  with  a

cursory  and  often  unconvincing  nod  to

those mandates, central bankers have tak­

en  on  fresh  responsibilities.  America’s

Federal  Reserve  seems  to  believe  it  has

both the obligation and the tools to reduce

racial inequality, while many central bank­

ers want to raise the relative cost of capital

for fossil­fuel companiesvia interventions

in the corporate­bond market.

Politicians have their own incentives to

expand  the  state.  It  is  generally  more  re­

warding for a politician to introduce a new

programme  than  it  is  to  close  an  old  one

down; costs are spread across all taxpayers

while benefits tend to be concentrated,

thus eliciting gratitude from interest

groupsandsometimesevenvoters.

Technology,inparticularcommunica­

tionstechnology,hasservedtostrengthen

the bureaucracy’sgrasp.Itis nocoinci­

dencethatbiggergovernmentsemergedat

roughlythesamepointinthe20thcentury

aslargecorporations,whichalsorequired

a new communications infrastructure.

Morerapideconomicgrowthpoweredby

thosenewarrangementsmadethegrowth

ofgovernment lessburdensome than it

mighthavebeen.

Hardlycromulent

Thesecondbroadfactorbehindthegrow­

ingpowerofthestateiswhatWilliamBau­

mol,aneconomist,named“costdisease”.

Inthe1960sBaumolnotedthatproductivi­

tyinsomesectorsisgreaterthaninothers.

Butwagesmustriseinlessproductivesec­

torsastheyriseinmoreproductivesectors

topreventworkersquitting.Sodespitethe

factthatanorchestraattheRoyalAlbert

Hallcontainsaboutthesamenumberof

musiciansasit didwhenthevenueopened

in1871,eachmusicianispaida lotmoreto­

day,giventhevastlygreateropportunities

thatareonofferintheeconomy.

Alotofgovernmentspendingisinar­

easwherelabour­productivity growthis

slow,mostnotablytheprovisionofeduca­

tionandhealthcare(seechart3 onnext

page).Astherealwagesofdoctors,nurses

andteachersgoupataratesetbyother

partsoftheeconomy,sodoesspending.

Whatismore,educationandhealthcare

arealsowhateconomistscall“superior”

goods.Aspeoplebecomerichertheyspend

a higherfractionoftheirincomeonthem.

Ifitisthegovernmentthatprovidesthose

services,itmustspendmore.Acrossthe

oecd overall health spending has risen

from8%ofgdpin 2005 to10%,andgovern­

mentsareresponsibleforthebulkofthat.

OthershaveextendedBaumol’sideas,

arguingthatgovernmentinterventionin­

hibitsproductivitygrowth.A recentreport

by Steven Teles, Samuel Hammond and

DanielTakashoftheNiskanenCentre,a

think­tankinWashington,dc, warnsofa

viciouscycleinwhichsubsidiesforservic­

esthesupplyofwhichisconstrainedby

regulations,suchashousingandeduca­

tion,pushupprices,creatingdemandsfor

furthersubsidies.Oneexampleisstudent

loans:inAmerica60%ofanyincreasein

themaximumsubsidisedloanispassed

throughintohighertuitionfees,according

toa studybytheFederalReserveBankof

New York. American politics is replete

with promises of further subsidies for

highereducation.Pledgestoreducecosts

arethinontheground.

Thefinalsteroidisthevoters’appetite,

whichdependsonwhothevotersare.Over

thecourseofthe20thcenturyincreasing

numberswereworkingclassandincreas­

ingnumberswerewomen.Politicalscien­

tistshavelinkedtheexpansionofwomen’s

suffrageacrosstherichworldtogrowthin

socialspending,especiallyonhealthand

education.

Twentieth­century voters were also

increasingly likelyto have fought in or

Spotthetrend

Governmentspending ,%ofGDP

Sources:VitoTanziandLudgerSchuknecht;IMF;OECD;AMECO *Forecast †1870-1937centralgovernment,1960- 0   1general government

2

60

40

20

0

1870 2021*

Austria

1870 2021*

Britain

1870 2021*

France

1870 2021*

Germany

60

40

20

0

1870 2021*

Italy

60

40

20

0

1870 2021*

Japan

1870 2021*

Spain†

1870 2021*

Sweden

1870 2021*

Switzerland

60

40

20

0

1870 2021*

United States

An era unended

United States, federal spending by source

% of GDP

1

Sources:Congressional Budget Oce;

Oceof Management and Budget

Netinterest

Net mandatory

Discretionary

30

20

10

0

40

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