Social Democratic America (17 page)

In other words, a nation can tax and spend quite heavily while still giving economic actors considerable freedom to start and operate a business, allocate capital, hire and fire employees, and engage in all manner of economic activities. This approach is sometimes called “flexicurity.” Government allows individuals and firms substantial freedom, with one exception: they pay a significant share of their earnings to the collectivity. This revenue is used to enhance security and opportunity and to ensure that prosperity is widely shared across the society. Economic freedom is abridged in one important respect, but is kept at a high level in all others.

This approach is tailor-made for a country like the United States, where citizens and firms prize economic liberty and flexibility.

FIGURE
4.15 Government spending and ease of doing business

Ease of doing business: country rank in 2011. Italy's rank is 87; it is omitted here.
Data source
: World Bank,
www.doingbusiness.org/rankings
. Government spending: total government expenditures as a share of GDP, in 2007.
Data source
: OECD, stats.oecd.org. The correlation is .12 (with Italy excluded). “Asl” is Australia; “Aus” is Austria.

Competition drives innovation and economic dynamism. Americans embrace competition as much or more than their counterparts in any other rich nation. Yet our economy is riddled with rules, regulations, and practices that inhibit competition or privilege particular firms and industries. Half-hearted antitrust enforcement allows corporate behemoths to maintain market share and profitability despite little innovation. Patents limit competition in pharmaceuticals, computer software, entertainment, and a slew of other product markets.
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Licensing, credentialing, and certification requirements for occupations or particular types of businesses dampen competition in product markets ranging from medical care to legal services to education to taxi transportation to hairdressing and beyond.
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Zoning restrictions and historic preservation designations limit the expansion of housing units in large cities by imposing building height restrictions and preventing new construction on much of the land.
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The federal government's practice of treating large
banks as “too big to fail” allows those banks to engage in riskier strategies, with potentially higher profit margins, and encourages investors to choose those banks over competitors. Both investors and management know that they are likely to be rescued by taxpayers if their bets go sour.
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Our federal tax code is chock-full of exemptions, loopholes, and benefits for particular firms and sectors.

Does an increase in the size of government weaken competition? On one view, the answer is yes. Here is Luigi Zingales, channeling Milton Friedman:

When government is small and relatively weak, the most effective way to make money is to start a successful private-sector business. But the larger the size and scope of government spending, the easier it is to make money by diverting public resources. After all, starting a business is difficult and involves a lot of risk. Getting a government favor or contract is easier, at least if you have connections, and is a much safer bet.
⁶¹

This sounds sensible. But
figure 4.16
shows that across the rich nations there is no association between the magnitude of government expenditures and the degree of competition in product markets. Competition is measured here as the degree of intensity of local competition, the degree to which corporate activity is spread across many firms rather than dominated by a few, the degree to which anti-monopoly policy effectively promotes competition, and the absence of barriers to imports. The scoring for each of these elements is based on a survey of executives conducted by the World Economic Forum. Though not a foolproof measure of competition, this is likely to be a reasonably accurate one. The data suggest that nations with big governments are just as likely as those with small governments to have competitive product markets.

Why is that? First, the hypothesis that big government results in less competition fails to consider the types of programs that make government big. Public insurance programs mainly transfer money to individuals; they offer little opportunity for firms or interest groups to grab a piece of the pie. This is largely true for government provision of services as well. Opportunity for large-scale diversion of public resources is present mainly in government service programs that rely on private provision, such as the US military or Medicare's prescription drug benefit.

FIGURE
4.16 Government expenditures and product market competition

Product market competition: average responses by executives in each country in 2011–2012 to four questions: (1) How would you assess the intensity of competition in the local markets in your country? 1 = limited in most industries; 7 = intense in most industries. (2) How would you characterize corporate activity in your country? 1 = dominated by a few business groups; 7 = spread among many firms. (3) To what extent does anti-monopoly policy promote competition in your country? 1 = does not promote competition; 7 = effectively promotes competition. (4) In your country, to what extent do tariff and nontariff barriers limit the ability of imported goods to compete in the domestic market? 1 = strongly limit; 7 = do not limit.
Data source
: World Economic Forum,
The Global Competitiveness Report 2012–13
,
www.weforum.org/reports
. For survey details, see
pp. 69
–
78
of the report. Government expenditures are measured as a share of GDP, in 2007.
Data source
: OECD, stats.oecd.org. The correlation is .04. “Asl” is Australia; “Aus” is Austria.

Zingales discusses a number of instances of American firms seeking and obtaining government favors. But most are efforts to avoid regulations or to shape regulations to their benefit; relatively few are attempts to gobble up government spending. A more generous set of social policies implies higher government expenditures as a share of GDP, but it need not imply greater regulation. Zingales has in mind countries like Italy, which has a government that both spends a great deal and regulates heavily. But as the
measures of economic liberty shown in the previous section reveal, there are other possibilities. The Nordic nations have comparatively high expenditure levels but modest regulations on business activity.

Second, much of firms' political activity involves lobbying for tax favors. If they devote a great deal of effort to this and succeed, the result will be a smaller state—in terms of expenditures as a share of GDP—rather than a larger one. American business is surely a world leader at lobbying for preferential tax treatment, and the loopholes, deductions, and exemptions in our tax system leave our government with less revenue, not more.

The hypothesis that higher government spending will lessen competition in product markets seems compelling. But in practice that's not what we observe. An expansion of America's public social programs is likely to have little or no impact on competition.

A related argument, made by Alberto Alesina and George-Marios Angeletos, is that “a large government increases corruption and rent-seeking.”
⁶²
The more a government taxes and spends, in this view, the more it invites lobbying by interest groups for favors, and the more opportunity and incentive it creates for policy makers and other public officials to dispense such favors.

Do big governments perform worse than small ones? There are various ways to measure the quality of government.
⁶³
A common indicator is the World Bank's government effectiveness measure, which attempts to gauge public and expert perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.
Figure 4.17
shows the relationship between countries' scores on this measure and their level of government spending as of 2007. There is no association. Countries with bigger governments don't tend to have less effective ones.
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FIGURE
4.17 Government expenditures and government quality

Government effectiveness attempts to capture perceptions of the quality of public services, the civil service and the degree of its independence from political pressures, policy formulation and implementation, and of the credibility of the government's commitment to such policies. Measured in 2007. The data set includes most of the world's countries, so “moderate” or “high” government effectiveness is relative to this larger group.
Data source
: Jan Teorell, Nicholas Charron, Marcus Samanni, Sören Holmberg, and Bo Rothstein, The Quality of Government Dataset, version April 6, 2011, University of Gothenburg: The Quality of Government Institute,
www.qog.pol.gu.se
, variable
WBGI_GEE
, using data from the World Bank. Government expenditures are measured as a share of GDP, in 2007.
Data source
: OECD, stats.oecd.org. The correlation is –.12. “Asl” is Australia; “Aus” is Austria.

The United States has some complicated government programs with an array of overlapping rules, benefits, and exemptions.
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We have, for instance, an assortment of programs and regulations that facilitate access to medical care: Medicare, Medicaid, the Children's Health Insurance Program (CHIP), the Veteran's Administration, tax breaks for employer contributions to employee health insurance, healthcare exchanges
run by federal and state governments in which private insurers compete for customers, a requirement that private insurance plans don't exclude people with preexisting conditions, a requirement that private plans allow parents to include their children up through age 25, and much more. Our tax system, with its multitude of deductions and exemptions, is equally complex.

This complexity can be costly. The IRS Taxpayer Advocate Service estimates that the direct and indirect costs of complying with the US tax code total more than $150 billion a year, or 1 percent of GDP.
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Inefficiencies caused by overlapping regulations and jurisdictions in healthcare are likely considerable, though I'm not aware of concrete cost estimates. The chief beneficiaries are those who lobby for and are best able to take advantage of the multitude of specific provisions and exemptions—industries, firms, and affluent individuals.

Simpler would be less costly. The tax overhaul in 1986 removed a number of exemptions and deductions and was able to raise the same revenue with lower tax rates. Similarly, a Medicare for All healthcare system would likely be less expensive. In both cases, a simpler system also would reduce ordinary Americans' confusion and frustration.