Opening the ‘government floodgates’

Brad Delong has given the opening that Krugman needed to come out and explicitly say what he has only been implying for a long time: “We need bigger government”!

Brad DeLong has posted a draft statement on fiscal policy for the IMF conference on “rethinking macroeconomics” — and I’m shocked, in a good way. As regular readers may have noticed, Brad and I share many views, so I expected something along lines I have also been thinking. Instead, however, Brad has come up with what I believe are seriously new ideas — enough so that I want to do two posts, following different lines of thought he suggests.

What Brad argues are two propositions that run very much counter to the prevailing wisdom, especially among Very Serious People. First, he argues that we should not only expect but want government to be substantially bigger in the future than it was in the past. Second, he suggests that public debt levels have historically been too low, not too high. In this post I consider only the first point.

Nowadays, however, governments are involved in a lot more — education, retirement, health care. You can make the case that there are some aspects of education that are a public good, but that’s not really why we rely on the government to provide most education, and not at all why the government is so involved in retirement and health. Instead, experience shows that these are all areas where the government does a (much) better job than the private sector. And Brad argues that the changing structure of the economy will mean that we want more of these goods, hence bigger government.

He also suggests — or at least that’s how I read him — the common thread among these activities that makes the government a better provider than the market; namely, they all involve individuals making very-long-term decisions. Your decision to stay in school or go out and work will shape your lifetime career; your ability to afford medical treatment or food and rent at age 75 has a lot to do with decisions you made when that stage of life was decades ahead, and impossible to imagine.

What I believe governments could do much better, and cheaply, while avoiding becoming gargantuan and stifling, is to design better incentives for people to behave in a more ‘virtuous’ manner regarding the long-run.

Some time ago I presented evidence that “too much government may be bad for the economy´s health“:

I find this quote from a little book called “Common Sense Economics” by James Gwartney, Richard Stroup and Dwight Lee (page 79) very pertinent:

Government is a little bit like food. Food is essential, but when consumed excessively, it leads to obesity, energy loss, and other health-related problems. Similarly, when constrained within proper boundaries, government is a powerful force for prosperity. But when it expands excessively and undertakes activities for which it is ill-suited, it undermines economic progress.

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