Free Market Fundamentalist, Top Story

Be Wary of the Return of Big Government

“More government” is not the answer to every problem.

Union Station Washington DC
South Front Entrance of Union Station in Washington DC, July 4, 2019 (Unsplash/Caleb Fisher)

Big government is back.

Massive rescue programs have prevented business failures and unemployment on the scale of the Great Depression, even though last year’s economic contraction was nearly as bad. The European Union agreed a €750 billion recovery fund, financed, for the first time, by EU-issued bonds. The money comes on top of national efforts. The United States Congress passed a $2.2 trillion stimulus, worth 10 percent of GDP, in March and added $484 billion in April. An additional $900 billion in relief was included in this year’s budget.

Joe Biden, the incoming American president, wants to spend $2 trillion more over the next four years to transition the United States to a greener economy and create a public health insurance program. Corporate tax would go up from 21 to 28 percent.

In Spain, a socialist government has introduced the biggest budget in Spanish history — partly to cope with the impact of coronavirus, but also to finance digitalization, electric cars, infrastructure, renewable energy and rural development. Taxes on income, sales and wealth are due to increase.

In the United Kingdom, the ruling Conservative Party is building more social housing and it might renationalize rail. Unlike during the last economic crisis, it does not propose to cut spending even though tax revenues are down.

Same in the Netherlands, where all the major parties agree the government needs to do more to reduce pollution and prevent people at the bottom of the social ladder from falling through the cracks.

I’m not opposed to more government per se. I’ve argued the United States should imitate policies in Northern Europe to improve child care, health care and housing.

But let’s be careful not to throw “more government” at every problem. Sometimes government is the problem.

Government size

Small-government conservatives obsess about the size of government. Public spending as a share of GDP is one of the twelve criteria according to which the Heritage Foundation judges countries in its Index of Economic Freedom.

But total government spending only tells us so much, and there is no one-size-fits-all ideal figure.

The French state, which consumes 56 percent of GDP, really is a drag on growth. But that has more to do with burdensome regulations and self-perpetuating bureaucracies that have outlived their usefulness than government spending per se.

It is why Emmanuel Macron is easing regulations on small businesses, ending transport monopolies and harmonizing public- and private-sector pensions — without cutting spending.

“Big government” doesn’t rule out a dynamic, free-market economy. Business creation was up 60 percent in France before the pandemic. Denmark, the Netherlands and the United Kingdom have relatively larger public sectors than America, but their economies are freer, according to the same Heritage Foundation.

It’s more instructive to look at how government spends its money. Britain and the Netherlands spend roughly the same on health care, but the British government-run health care system produces far worse outcomes in terms of availability of care, patient satisfaction and privacy than the mixed public-private system in the Netherlands, which is the best in the EU.

Labor

One of the arguments for stronger government is that years of “neoliberal” labor policy have created a “precariat” of low-paid and low-skilled workers, who are hired as contractors, don’t enjoy health-care and pension benefits, and can get fired on a whim.

There is truth in this, especially in the United Kingdom and the United States, where Amazon warehouse workers and Uber taxi drivers struggle to make ends meet despite working full-time jobs.

In France, Italy and Spain, the problem isn’t “neoliberal” labor law, but the opposite: ironclad employment contracts make it almost impossible to lay off workers. High social contributions from companies stifle business growth.

The result is the same: a dual labor market in which well-educated and older workers enjoy full benefits and protections while low-skilled and younger workers are relegated to zero-hours contracts.

Biden’s proposals to define “gig economy” workers as employees, ban noncompete clauses and no-poaching agreements, raise the federal minimum wage to $15 per hour and restore collective bargaining rights are a necessary corrective to years of pro-business policy.

Macron made it easier for companies to hire and fire workers in France, but he also introduced an obligatory unemployment insurance for freelancers.

Most political parties in the Netherlands want to do the same. I’m wary. Dutch law already forbids companies from hiring “freelancers” full-time, which I think is right. Most of the remaining 1.1 million workers who are self-employed (roughly one in nine) are high-skilled professionals. Do they need to be told to get insured? Aren’t they able to plan for periods of unemployment?

The Italian government has gone exactly the wrong way. In a bid to curtail temp work, it canceled the introduction of a new type of contract that would have sat in between fixed-term and indefinite and given employers more flexibility.

Americans and Italians suffer under excessive licensing requirements, which make it difficult to start a small business in everything from hair braiding to plumbing. Biden says he wants to tackle this, but many of those regulations were put in place by his own Democratic Party in an overzealous bid to protect consumers.

America does have easy access to credit whereas Italy is one of the worst countries in the developed world to get a loan. Permits also take a long time, driving a considerable amount of economic activity into the informal sector. There is a clear case for deregulation, and it’s one everyone from the European Commission to the World Bank has made for years, but Italy doesn’t share their sense of urgency.

Housing

Affordable housing is in short supply on both sides of the Atlantic, but again the causes are different, which suggests the remedies must be too.

The American government arguably did too much to help low-income homebuyers by giving them cheap loans they couldn’t afford, which caused the subprime mortgage crisis.

It doesn’t do nearly enough to help renters. An estimated 11 million Americans qualify for housing vouchers under the law but don’t receive any, because funding is capped annually by Congress. Biden wants to change this, and also bar landlords from discriminating against recipients of housing aid.

Germany and the Netherlands do too much to help low-income renters at the expense of middle incomes. Nurses, police officers and teachers earn just above the threshold to qualify for social housing, but they don’t make enough money to be able to afford a mortgage in cities like Amsterdam and Berlin.

One in two homes in Amsterdam are owned by semi-public housing associations. The city has been selling off such homes in hopes of reducing rents in the private market. It also demands that private developers include affordable rental apartments in new buildings.

Berlin is trying the opposite approach. Rather than relax regulations that limit rent increases and make it impossible for landlords to evict tenants who pay their rent on time, the city has implemented a five-year, across-the-board rent freeze. The result: fewer homes will be built until the end of the freeze is in sight.

Infrastructure

America’s notoriously underfunded bridges, railways, roads and tunnels have made “Infrastructure Week” the Godot of Washington DC: every president promises improvement, but everyone is still waiting.

Matthew Yglesias, who recently left Vox to start a newsletter, frequently writes about this issue, as does Noah Smith, who still writes for Bloomberg Opinion in addition to his own newsletter. Their analysis suggests monopolistic building interests as well as trade unions, disinterest in poor commuters and a political preference for charismatic over run-of-the-mill projects all play a role. More money may be part of the solution, but it won’t be the entire solution.

Nationalization

This is a debate we don’t need to have again: there is no doubt privatized businesses have been more efficient than state companies.

Martin Wolf of the Financial Times remembers what nationalized industries were like:

They were chronically overmanned and heavily politicized. They either underinvested or made poor investment decisions. Not least, they treated users with indifference. I was among those users. This form of ownership did not wither because it worked. It withered because it did not.

It is the reason the Netherlands abolished its single-payer health-care system in the early 2000s, when patients had tired of waiting lists and impersonal service. The UK should do the same.

In rail, privatization hasn’t made a big difference for workers. It has for passengers.

In the UK, between 1948, when the railway was nationalized, and 1993-94, when it was privatized, total passenger kilometers fell by 11 percent. After privatization, passenger kilometers rose by 128 percent.

Not surprisingly, congestion has now become a concern. But the growth in journeys is in itself a powerful indicator of success.

Wolf’s colleague Sebastian Payne believes the two biggest challenges in British rail are not related to ownership:

  1. Britain is a small, crowded island. It doesn’t have vast empty spaces for shiny high-speed railways. Even when there is a concerted effort to build, NIMBYism (objecting to construction projects in one’s backyard) kicks in.
  2. The network is old. Britain pioneered railways and has for decades carried out upgrades in a haphazard, piecemeal way.

The problem in America isn’t lack of space; it’s too much space. Chicago is about as far from New York as Barcelona is from Brussels, and few Europeans would take a train for that journey. Distance naturally makes building and operating railways more expensive.

Megan McArdle has argued that stronger land rights, the ability to appeal and delay expropriations for many years and competition from cheap airlines further conspire to make rail so expensive in America.

Payne’s second point calls for more government involvement, and indeed there has been investment in lines and stations across the UK.

In the Netherlands, tracks are maintained by a government agency while the trains are nominally private. But the largest train operator is still wholly owned by the government. Amtrak couldn’t survive without subsidies either.

Finding the right balance between public and private can be tricky, but we tried wholly public and abandoned it for a reason.

2 comments

  1. Single-payer is:

    The most cost effective
    The most fair
    Has the most successful outcomes

    There’s a reason every developed nation has GUARANTEED healthcare for EVERYONE.

    Millions of Americans are dying because they can’t afford to stay alive.

    Any idea in your head that tells you that’s preferable to a change in policy, is bad and wrong and you need to get rid of it. Use your moral compass.

  2. Thanks for your comment, Jules.

    I support health care for all, but I believe there are better ways to do it than single-payer. All the research and international comparisons I’ve read suggest that a government-run health-care system is not, in fact, the most cost-effective, nor does it produce the best outcomes. Perhaps you can recommend studies that show otherwise?

    In the meantime, I highly recommend this series from Vox, which looks at different health-care systems around the world.

    Every system has tradeoffs, but it does seem that mixed public-private systems, in which there is both competition and a significant role for government, are best are delivering high-quality, affordable health care to everyone.

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