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Archive for January 21st, 2020

In this podcast discussion with Gene Tunny, I pontificate on several fiscal issues, including the ideal size of government, Wagner’s Law, and the importance of quality governance.

The conversation is a good introduction to the debate about “state capacity” generally and “state capacity libertarianism” more specifically.

Regarding the former, I explained last year why it would be a bad idea to expand the size and power of governments.

Most advocates of increased state capacity are on the left. For instance, Joseph E. Stiglitz, Todd N. Tucker, and Gabriel Zucman argue in an article for Foreign Affairs that high taxes and big government are a necessary condition for prosperity.

…markets have not flourished without the help of the state. …The invisible hand of the market depended on the heavier hand of the state. The state requires something simple to perform its multiple roles: revenue. It takes money to build roads and ports, to provide education for the young and health care for the sick, to finance the basic research that is the wellspring of all progress, and to staff the bureaucracies that keep societies and economies in motion. No successful market can survive without the underpinnings of a strong, functioning state. …States lay the basis for the healthy, educated populations that can participate in and contribute to the successful flourishing of markets. Allowing states to collect their fair share of revenue in the form of taxes will not usher in a dystopian era of oppressive government.

Their argument, in my humble opinion, is strikingly anti-empirical.

  • According to their theory, it was impossible for western nations to become rich in the 1800s when government was very small and there was no welfare state. Yet it happened.
  • According to their theory, it is impossible to provide public goods if government consumes only a modest share of economic output. Yet that’s not what we see in the real world.

For purposes of today’s column, let’s focus on the issue of “state capacity libertarianism.”

Professor Tyler Cowen from George Mason University basically asserts that libertarians should accept a “strong state” and focus on making it effective.

Strong states remain necessary to maintain and extend capitalism and markets.  This includes keeping China at bay abroad and keeping elections free from foreign interference, as well as developing effective laws and regulations for intangible capital, intellectual property, and the new world of the internet. …A strong state is distinct from a very large or tyrannical state.  A good strong state should see the maintenance and extension of capitalism as one of its primary duties…high levels of state capacity are not inherently tyrannical.  Denmark should in fact have a smaller government, but it is still one of the freer and more secure places in the world… Many of the failures of today’s America are…failures of state capacity.  Our governments cannot…much improve K-12 education, fix traffic congestion, or improve the quality of their discretionary spending. …Public health improvements are another major success story of our time, and those have relied heavily on state capacity.

Depending on how one interprets Tyler’s column, there’s some room for agreement.

  • If “strong state” means a jurisdiction that has the rule of law, I assume everyone favors quality governance.
  • If “strong state” means that a nation can survive with a big welfare state, Denmark shows that is possible.
  • If “strong state” means government re-focusing on provision of genuine public goods, I’m very sympathetic.

But there’s also room for disagreement.

In a column for the American Institute for Economic Research, Vincent Geloso and Alexander W. Salter make the critical point that proponents of state capacity get the causality backwards.

Cowen contends that state capacity (broadly, the government’s ability to accomplish its intended policy goals) is not inimical to liberty and development. In essence, a strong state can protect property rights and provide important public goods, which may support and even extend markets, so long as it is appropriately constrained. Thus, a strong and capable state promotes liberty and economic growth simultaneously. …If anything, the relationship runs backward – greater development invites greater state capacity. …while it doesn’t make much sense to claim state capacity causes development, it makes much more sense to claim development causes state capacity. …A rich country with a weak state invites the predation from other countries. The inability to defend a certain stock of appropriable wealth is a lure… The weak state-capacity country has two choices. The first is to be conquered and absorbed by the strong-state-capacity country. The second is to invest in state capacity (i.e. a centralized-hierarchical fiscal bureaucracy that can harness resources for the purposes of producing national defense and/or others). …growth generates an externality in the form of heightened attention from potential predators. …As such, state capacity is not causing growth. It is a product of growth.

Professor Ilya Somin, a law professor at George Mason University, is very skeptical of state capacity libertarianism, in part because he finds little evidence for the proposition that strong government is a predicate for growth.

…it’s worth asking exactly what Tyler means by “state capacity.” He does not provide a very clear definition. …Tyler fails to specify how we measure the type of “capacity” he considers important… state capacity theorists have not done a good job of differentiating cases where state capacity is the cause of good outcomes from those where it is a result of them (e.g.—a state in a wealthier society has more capacity than one in a poor society, even if the state did little to create that wealth). …looking at some of the greatest evils and injustices out there, I see many that libertarianism is very well-equipped to handle. …In each of these areas, there are enormous gains to be had simply by having government engage in less of the activity that is causing the problem to begin with. …none of these incremental reforms require much, if any, state capacity that doesn’t already exist. …The problems with education, traffic congestion, and discretionary spending are not a lack of “capacity” but a combination of inherent flaws of government and poor incentives.

He also is justifiably concerned that a strong government inevitably will misbehave, presumably for “public choice” reasons.

…even if “[a] good strong state” should see “the maintenance and extension of capitalism as one of its primary duties,” it doesn’t follow that it actually will. To the contrary, the more power the state has, the greater the temptation for politicians to misuse it, especially in a context where they are appealing to poorly informed voters. …at this point in history, it doesn’t seem like the US and other Western democracies lack the capacity to do such things as provide a modicum of security and public goods. Rather, the problem is that our governments are engaging in way too many other functions, many of which are both harmful in themselves and divert resources away from the things that government should do.

For what it’s worth, my view of state capacity libertarianism is the same as my view of national conservatism. And compassionate conservatism, kinder-and-gentler conservatism, common-good capitalism, and reform conservatism as well.

I will be highly skeptical until someone shows me the tiniest shred of evidence that further reducing economic liberty can lead to more prosperity.

P.S. While they’re definitely not libertarian, international bureaucracies are big advocates of boosting state capacity. They argue that bigger government will somehow kick-start grow in developing nations. Here’s my sarcastic – yet accurate – depiction of their methodology.

For those who disagree, all that I ask is that you successfully answer at least one of these two questions. Until and unless that happens, there’s no alternative to the tried-and-true recipe for prosperity.

P.P.S. Here’s Part I and here’s Part II of my “Fight on the Right” series.

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