The case for bigger government

At Freedom Week, the summer school for students the ASI and IEA run in Cambridge every year, we do a ‘steel man’ (opposite of a straw man) debate where I try to give what I think is the best case for leftism. These are my notes – NB I do not actually agree with most of what I’m saying here.

We need government because we need the three R’s:

• Regulation
• Redistribution
• Solid-R-ity

On each measure we have too little government and need more of it.

Regulation

Climate change

Everyone agrees it’s an enormous issue, perhaps even existential.

Carbon taxes seem elegant but won’t work:

• They’re not politically sustainable – they require ordinary people to face big cost of living increases and the one example of a true carbon tax we have, Australia, was incredibly unpopular and repealed.
• Also don’t work if people are demand inelastic for carbon-heavy goods – basically trade off future climate risks for present consumption.
• Require international tax co-operation which is extremely unlikely. Otherwise it risks having negative impact on trade and investment i.e country with lowest carbon tax is more attractive.

Cap and trade is rife with corruption and has been a hand-out to big business – they’re given permits which they then sell on at a profit to themselves.

You can imagine alternative designs but these will either be administratively difficult (eg, giving each citizen a carbon emissions permit) or just lead to big government (eg, an auction).

Instead we need to invest in green technology. The private sector will not do this, because private actors do not capture most of the benefits of innovations – only 3% of the benefit accrues to the innovator, in general.

Unfortunately we need to bribe people into supporting action on climate change – via subsidies that encourage good behaviour rather than taxes that punish bad behaviour. And we need to make this appealing to a broad swathe of society, so that this enormous effort has the broad public support it needs. This is the logic of the Green New Deal: it bundles necessary spending on carbon reduction and painful regulations on emissions with spending designed to reduce inequality. People will only support climate action if there’s something in it for them – we need to increase the size of government to do that.

The case for spending big on R&D is that the spillovers are global too. If we come up with clean energy tech the whole world benefits – this is the case for spending government money on R&D in general, because if you leave it to the private sector you get less than is socially optimal, and it is even stronger here.

Consumption and signalling “arms races”:

Much of what we spend money on is simply about competing with others in an arms race, like education:

Ben himself has written on how much of the spending and time we do on education is about signalling our abilities, not learning new things, and the more resources others spend on this the more we have to – it’s an out of control arms race.

Or luxury goods, where people waste hundreds of thousands of pounds on cars and millions on property just to one-up each other, and a huge amount of consumption now is about image and branding rather than intrinsic enjoyment. We have both “Keeping up with the Joneses” and “Keeping up with the Kardashians.”

Expenditure on marketing is passed on to consumers in the form of higher prices. Advertising has become more about selling “lifestyle” less about functionality of products and services – risk that this distorts innovation as true use of products/services are masked.

Healthcare:

The US healthcare system is not the only option. But it is clearly the most unregulated example of healthcare we have – there is a lot of government spending and quite a lot of coverage requirements (the alternative would be people being totally unable to get healthcare, which would be even worse), but very little actual PRICE regulation. Even Singapore has a heavy government hand both in requiring people by law to save for their healthcare and controlling prices.

This is exacerbated by the problem of bargaining power – individual health insurers negotiate with drug companies that have monopolies on the supply of particular drugs. In other countries the state does the negotiating, so it can get better prices. This is an economy of scale that explains why “just giving people money” doesn’t always work.

One of the reasons the US system is so expensive is that America is very rich and people have no constraints on how much they can spend on their health – so people throw fortunes at the possibility of living for an extra six months. It turns healthcare into a luxury item and, given that the supply of people who can be doctors is limited, diverts resources away from more needy people. The UK’s rationing approach might seem brutal but it prevents this kind of waste.

And there’s asymmetric information and incentives – people don’t know what’s good for them and doctors are incentivised to provide more and more. Unlike consumer goods people trust the salesman and end up massively overconsuming.

So that’s point one: we need more government to fight climate change, and to prevent the waste that free markets left alone lead to in some of the most important parts of the economy.

Point two is that we need more redistribution.

Income inequality as measured by the Gini coefficient rose by about 36% in the 1980s under Thatcher, but the real story is the share of income that goes to people at the very top:

According to Greg Mankiw, a conservative economist, in the United States the 1%’s share of total income, excluding capital gains, rose from about 8 percent in 1973 to 17 percent in 2010. Between 2010 and 2015 it’s risen from 17% to 22%!!

It’s incredibly concentrated even among the super-rich. The top 0.01%’s share of national income – this is just 16,000 people in a country of 330 million – rose from 0.5% in 1973 to 3.3% in 2010 to 5% in 2015. Their share of income quadrupled in just 35 years!

Most people believe in the declining marginal utility of money – one dollar is worth more to a single mother on benefits than it is to Jeff Bezos. If you don’t believe in this, you might be a libertarian.

There isn’t even the case to be made that we need to give these people this much money because we need to incentivise top talent to innovate or work for us. Anton Howes has shown that innovators do it mostly for the prestige, and it’s a bit of a stretch to imagine that Jeff Bezos wouldn’t have set up Amazon for a “mere” few billion instead of hundreds of billions.

Sometimes people like Ben use the example of footballers as people we pay lots to – but would footballers earning tens of millions a year really give up playing if they “only” earned two or three million pounds a year? Ben might say they’d go abroad, but that’s an argument for every country agreeing to cap or heavily tax their salaries. In other words, even more government!

On the other side, more and more people in the West are losing out to globalisation and automation.

What do you do for ex-steelworkers in Middlesbrough who cannot compete with Chinese steelmakers?

You could “just give them money”, which is itself quite a big government policy.

But many of these people need help spending that money for their long-term benefit, perhaps don’t know how they can retrain effectively, or might face a collective action problem whereby if all of them retrained in a particular way, a new industry could set up there – perhaps supported by the state either directly or through infrastructure.

Just giving people money is fine if you don’t mind them playing video games all day – but many people themselves would tell you that they don’t have the willpower to go back to school or find new work, even if they could do so in theory.

There’s a big role for government to direct investment towards these places, using the money we’ve taken from the winners from globalisation, either to support private industry or just set up our own industries to employ people the private sector won’t.

So that’s point two: the super-rich are eating a bigger and bigger slice of the pie, for no good reason, and there are lots of things we could use that money for to make ordinary people’s lives better.

Point three is about solidarity.

The state can provide social unity better than any other institution, and universal public services are often much better than means-tested ones.

Take public housing for example.

In the UK, public housing is mostly left to the poor. It’s low quality and associated with poverty and crime. But in places where the state provides high quality public housing for everyone, there’s a virtuous circle that ensures that it doesn’t get neglected the way ours is.

This is what the government does in supposedly free market Singapore – where 82% of the population lives in high quality public housing.

And in Vienna, where 62% of the population does. The housing is really beautiful here too.

Both these cities are among the world’s most liveable, and in both the public housing gives people one of the most important things people need for affordable prices.

Why does it work there but not here? Because in the UK and the US we’ve had cream skimming, where people with good jobs go off into nice private sector neighbourhoods, leaving behind people with worse prospects. There’s a reason they’re called “sink estates”.

And this means that these places are neglected by govt, because the people with loud voices in politics don’t live there.

The key point here is solidarity. The reason the NHS has strong public support and isn’t neglected by politicians is that almost everyone uses them. The reason UK public housing is neglected and welfare benefits are cut repeatedly is that only people who are essentially voiceless use them. Means-testing is a way of narrowing public support for state services. When you make services universal you get buy-in from people with voice and you protect them from unnecessary cuts.

If we had broad-based buy-in to public housing, so that it was the default not the exception, we’d have proper communities in these places with people from all walks of life, and with the political voice to demand that they are looked after. This might be true for other things too, like childcare, social care and to some extent education, where instead we get a piecemeal system that the rich opt out of, leaving the voiceless poor.

That kind of universality also helps the state to drive social integration:

In Singapore, the government used its housing to force integration of different racial groups. Racial integration is one of the key goals of the Singaporean state, because it was borne out of racial intolerance and is so racially diverse. If people all chose to live with their ‘own kind’ you would end up with much more racial divisions.

In the UK, we’ve tried to mix people of different ethnic backgrounds and social classes by mixing state housing throughout cities and doing academic streaming within schools. But because the kids of rich parents can just go to private school, they both get a huge advantage in life AND get to live without ever knowing people who aren’t like them.

Civic nationalism is the answer to ethnic nationalism.

In some ways Ancient Rome was a giant experiment in multiculturalism – it was your status as a citizen that mattered, not your race. Ancient Roman literature is remarkable for the absence of racism and ethnic tribalism and it really seems, to the modern eye, that the creation of a pan-Roman identity allowed people to rise above primitive tribalism.

Civic nationalism in the United States has always been one way of coping with some of the deep racial divides that country from the era of slavery and colonisation. It’s a way for people to identify with each other and be proud of their group without resorting to racial hatred.

Economic solidarity is the key to avoiding extremism:

Think back to those figures about the income of the top 1% and top 0.01% again – the top 16,000 Americans taking 5% of the country’s entire income.

This has gone alongside a rise in political extremism – the deeply ethnic nationalism of Donald Trump, and in Europe the obsession in the wake of the financial crisis and the ensuing recession with foreigners and elites that are supposedly controlling the world.

What is the cause of this? If people consistently perceive a vast wealth chasm between themselves and other citizens (and especially if this replicates over generations), it can cause a huge amount of resentment, and potentially unrest and extremism.

A state that makes solidarity – civic, political and economic solidarity – one of its core goals can be a moderating force, and give people a sense of identity that they crave without them having to resort to fringe weirdoes.

That’s my third point.

To conclude:

Countries like Germany and France, which are richer than the UK and as rich respectively, prove that more regulations don’t make you poorer.

Places like Norway, which has a sovereign wealth fund that owns 50% of the economy, and Hong Kong and Singapore, where the state owns most of the land and rents it out to the private sector, prove that a big state doesn’t make you poorer.

And on things like climate change and runaway markets, economic inequality and people being left behind, and giving people a higher purpose to believe in, the evidence is all with me: it’s not that we can’t afford big government, it’s that we can’t afford NOT to have big government.