Archive for December 8th, 2021

If we want more prosperity, what’s the ideal size of government? Anarcho-capitalists would say it shouldn’t exist at all, while some hard-core leftists want something like North Korea, where the state is everything.

The rest of us want something between those extremes, but that still leaves plenty of room for disagreement.

I think limited government is the recipe for economic dynamism, which is why I’m a big fan of the  U.S. Constitution, which was designed to limit the powers of Washington.

Others believe that government should be bigger, in some cases much bigger, with international bureaucracies often advocating this view.

There are even some libertarians who believe that more government spending can lead to economic growth by boosting “state capacity.”

What is state capacity, in case you’re wondering? It’s the notion that the private economy is more likely to flourish if government is sufficiently large that it can competently fulfill certain functions.

Writing for Econlib, Professor Bryan Caplan explains one of the problems with the literature on state capacity.

In the last few years, social scientists have started heavily appealing to “state capacity” to explain the wealth of nations.  Why do some countries prosper?  Because they have great state capacity.  Why do others flounder?  Because they have crummy state capacity.  What do floundering countries need to do in order to prosper?  Build state capacity, naturally. …Weak and question-begging empirics aside, the whole literature is conceptually confused. …the coronavirus crisis plainly shows that Western democracies have overwhelming state capacity. …What’s going wrong?  Simple: Despite fantastic state capacity, the U.S. government has absurd state priorities!  Instead of squandering trillions on poorly-targeted relief, the U.S. government could have spent a few hundred billion on testing and vaccine research.  Better yet, it could have offered hundreds of billions in prizes for progress in these areas – prizes open to anyone on Earth to win. So why didn’t this happen?  Simple: Because the people in charge in virtually every country are irresponsible, disorganized, innumerate, impulsive, and emotional.

Professor Caplan points out that supporters of bigger government don’t have a coherent response to this problem.

I don’t think I’ve ever heard a fan of state capacity research acknowledge this obvious point, much less try to fairly adjudicate it. …I’m tempted to say that appeals to state capacity are tautological, but even the tautologies are half-baked.

If you want an example of how proponents go awry, check out a new study on this topic from Brink Lindsey of the Niskanen Center.

It certainly seems like he wants readers to blindly accept the notion that bigger government means competent government means more prosperity.

The concept of state capacity – “the ability of a state to collect taxes, enforce law and order, and provide public goods” – was developed by political scientists, economic historians, and development economists to illuminate the strong institutional contrast that parallels the economic contrast between rich and poor countries. Rich countries are all distinguished by having large, strong, and relatively capable states; poor countries, by contrast, are generally characterized by weak and frequently ineffective states.

This is a remarkable anti-empirical excerpt. Let’s look at two reason why Lindsey’s argument doesn’t hold water.

First and most important, it ignores the fact that today’s rich countries in the North American and Western Europe got rich – and achieved high levels of state capacity – when they had very small governments (and no redistribution programs) back in the 1800s and early 1900s.

This is a very inconvenient fact for who argue bigger government is needed to boost state capacity.

Second, it also ignores the fact that there are countries today with very high levels of state capacity and very modest-sized governments. Consider, for example, the “Asian Tigers” of Singapore, Hong Kong, and Taiwan. These jurisdictions rank very highly for public goods, yet the burden of government is very small by modern standards.

This is a very inconvenient fact for those who argue bigger government is needed to boost state capacity.

Here’s the bottom line: Does anyone actually believe more government spending will make Washington more competent and effective?

For instance, is there any reason to think Biden’s tax-and-spend policies will improve the federal government’s performance?

Or let’s shift to the developing world, places that don’t do a good job providing actual “public goods.”

These are place that would benefit from (properly defined) state capacity, but who thinks bigger government will lead to better government in Honduras? Or Pakistan? Or Malawi?

Simply stated, it is highly unlikely that bigger government leads to more competent government. Indeed, all the evidence points in the other direction (with the pandemic response being a painful example of how bloated governments do a bad job of responding to genuine problems).

Which is why I developed the Seventh Theorem of Government.

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