My post about how to measure appropriately the extent of wasteful government interference in the economy has now been put on Liberal Conspiracy, though shortened.

This has led to the important caveats for the Left being removed, and makes it worth reiterating that the point is NOT to grant carte blanche for government of any size.  In the next few years of high fiscal strain, we may get ‘smaller’ government on the plain G/Y metric*. But this might be accompanied by all sorts of ‘free’ interventions inspired by hindsight trading of the Crisis.  Many of these will damage our ability to grow.   So allowing sheer fiscal stress to work this ratio downwards will not mean the problem of the state damaging the economy will have gone away.

A very pertinent example (though unrelated to the crisis) is how public sector wage rates are decided in this country.   Many of you may be aware of the problem  when a single high value sector crowds out valuable resources, causes prices to rise, and makes development of other sectors difficult.  This can be associated with a natural resources discovery (see Dutch disease).  But it can also happen in well-intentioned development: an NGO lands in a poor country, hires the brightest staff, raises prices, and perpetuates underdevelopment if it is not propertly handled.  The same thing can potentially happen when the public sector employs too many people in a poor part of the country, on wages that are the same as paid in Surrey.  It undermines a competitive advantage of that part of the country, by raising wage costs too high.

In my approach to government-in-the-economy, I want to have it both ways, and believe I should be allowed to.  I want the government only involved in economic transactions where it makes sense: public goods, improving market function (ie attacking monopoly), dangerous externalities, and so on. I also favour some redistribution, to reflect fairly conventional notions of justice .

But I am also strongly opposed to the government shrinking in a recession, for straightforward Keynesian reasons.   I think these two positions are perfectly compatible, and it is a misreading of the significance of the G/Y ratio at such junctures that leads to a lot of confusion and misguided polemic.  Let us keep a stern eye on governmental interference in things better done privately.  But obsessing on a single metric is not the way to do it.

UPDATE: Chris Cook of the FT discussed related matters back in May this year.  He makes this good point:

These reliefs, incidentally, are one reason why the tax-to-GDP ratio is a daft way to think about how much influence the state has over the economy. If you raise the tax ratio from 40 per cent to 45 per cent by cutting reliefs, you are reducing state control of the economy.

*G = government consumption.  Y = GDP


6 thoughts on “Further commentary on size of government

  1. Lol, Rawls’ second principle as “conventional”.

    You just did to political theorists what the statement “Keynesianism is broadly correct about unemployment” will do to economists.

    1. Well picked up on Paul! I did myself and no doubt Rawls a disservice there. What I meant was that I am not having to invent some sort of view, far off the mainstream, to say these things – not “Rawls, obviously right innit”
      In fact, 120 pages into Sen ‘The Idea of Justice’, from what I can read there is nothing in his principles that I think survives really close scrutiny and argument. I don’t like the transcendent aspects, nor the assertion of what we would all agree in an original position. I am not sure it generates a practical basis for policy – Sen is being as polite as he can, but I hope he comes up with something slightly more robust.

      And is it really fair to compare with Keynes? Did people really not think these things before he put them into an academic system? An honest question – I am a real amateur in this area

  2. A couple of very interesting posts there, Giles.

    On the LibCon editing issue, I’ve had three or four posts edited to the extent where I think a key point or main issue has been lost, and then foumd myself defending what I’m thought to have said by reference to what I actually did say on another site. I actually stopped offering them to LibCon, not out of prima donnaship but simplybecause I was losing time commenting on blogs which I didn;t think represented what I thought. Sunny just copies them over now without asking me, on the unofficial understanding that I don’t mind, but that also means I no longer feel totally obliged to respond to comments there when I’m engaging with what is, in general, a more courteous/properly engaged readeship at Though Cowards Flinch. So it kind of works – might do for you too. Good to see you posting there though.

    On the more substantive issue of measuring the size of the state, I think your stuff about the importance of measuring properly what;s going on is really good (though perhaps you understate the importance of public sector contracting and the potential for using to even out to some extent the regional disparities you refer to), and of course we have different views on the value of national wage bargaining which I won’t insulot your intelligence by going over here.

    What really interest me is the at least implicit assumption, not just here but more generally amongst centre and centre right commentators, that the left is actually in favour of a bigger state than the right is. I would contend, and have done so at length at (‘Matter of State, which is a response to a Chris Dillow piece) that this is a misrepresentation of much of the ‘better’ left’s attitude to the state (though I acknowledge that the argument has not been suffciently made, and that was is important is not the size of the state but the extent power over resources (‘means of production’ in its widest sense), whether these be considered within the state or not.

  3. We WILL have to insult one another later, because the piece about national wage bargaining that CF are going to produce is ***ing excellent, and one I really stand by. Not written by me.

    I think, on the whole, the Left DOES prefer a large state, because much of what it likes to promote involves state spending and redistribution. And (olde world), it likes telling people what they should be paid, and running some industries. I think this is hard to deny. Your view seems more interesting – state as an instrument of the Capitalist class – and surely has some legs. Who have I read on that? Perry Anderson, maybe, and that Long Twentieth Century book.

    IN fact – if you like – I wrote my masters thesis on Turkey’s financial crisis of 1875, critiquing the World Systems view that this was all about capital directing states. Or something.

    On this stuff, do you have a view on Iceland and their paying back of debt? A sub-1000 word post on ThoughCowards would be read with interest . ..

  4. 1) Let me know when you publish your rampant bollox.

    2) For the left the state can become a guardian against the rampages of capitalism if elements of it are in the hands of the left, so , for example, I have no problem with decent H and S legislation and the resources needed to enforce it (those who think it’s ‘PC gone maaad’ tend not to work in potentially dangerous environments). And yes, I’ve accepted that state ‘protection’ can become an end itself for the left, just as for the right using the state to maintain order can become an end in itself, or a tool to keep the working class divided). But a big state should never be a left aim; instead the focsu should be on where power really lies, and that demands a more subtle examination than the state/non-state divisions (which you unpick too).

    3) Not really worked out Iceland. There seems to have been a good deal of oversimplified reporting judinging by the need to write this

    4) You can always just pretend my 2,000 worders are two 1,000 word pieces.

  5. I really like what you have written in (2). I will bookmark it under sensible, and radical. It makes me all the more sad for when (1) is fulfilled and you find your views mercilessly crushed . . .;-)

    I am getting blizzarded by the volumes of writing on the rights and wrongs of Iceland. It makes me contemplate a terrible thought – perhaps I should not write a 1000 worder on it myself . . .


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