The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [116]
Figure 16. Economic planning collapsed with the Berlin Wall in 1989.
HOW GOVERNMENTS FAIL
Oliver Williamson, one of the 2009 Nobel laureates in economics, pointed out in his acceptance lecture in Stockholm: “Because all feasible modes of organization are flawed, the observation of a ‘market failure’ does not. . . . warrant regulation (which also experiences failures).” It is a wise caution against the presumption, which has characterized much economic analysis since the pioneers of welfare economics first diagnosed market failure, that the government can always fix the problem.3 Williamson draws our attention to the intractability of the problem of organizing the economy in some circumstances.
The diagnosis of how governments fail as economic managers starts with the theory of “public choice.” Originating with James Buchanan and Gordon Tullock’s pathbreaking book The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), this approach rightly gets away from the presumption that decision-makers in government, politicians and bureaucrats, always act in an impartial and objective way in order to improve the welfare of society. On the contrary, like everybody else, they will be inclined to act in their own self-interest, which will include being reappointed or reelected and promoted. The public choice approach was extended by Mancur Olson. He analyzed the way special interest groups can so effectively “capture” government decisions.4 So government actions will often ignore the interests of other groups or—particularly relevant for my argument here—those who can’t vote, including future generations. An economy in which the government plays a large role may well be short-termist and populist even in a broadly honest democracy. In authoritarian countries, or corrupt countries, or those without a vigorous free media, there is no reason at all to expect government intervention to enhance social welfare.
Of course, all Western countries, including the United States with its relatively small public sector, do have extensive government intervention in the economy. The most ardent free marketeers recognize that governments are needed to ensure the rule of law and uphold contracts, to build some parts of the country’s infrastructure, to provide services especially at local level—policing, garbage removal, public schools, road maintenance, and so on—and to provide at least a minimal welfare safety net. As the size of government relative to the economy grew in the West during the postwar years, so did dissatisfaction with how well the public sector served citizens. This was voiced in different ways across the political spectrum. John Kenneth Galbraith struck a chord with his liberal political constituency when he wrote of “private affluence and public squalor,” which was a call for better as well as more government services. By the time Ronald Reagan said in his first inaugural address, “Government is not the solution to our problem; government is the problem,” his audiences were receptive.5
Why had government come to seem so ineffective by the 1980s? After all, the share of the economy accounted for by government had climbed from 24 percent in 1950 to 34 percent by 1980 in the United States, and to 43 percent on average in the OECD, so on the face of it, government should have been achieving more. What’s more, it’s hard to argue that any economy has become substantially less regulated in recent decades. There are several related reasons for the perception that government actions were becoming less and less effective.
First, a large part of the increase in expenditure was due to higher social spending, or in other words spending arising from social problems such as pensioners with inadequate incomes or single parents or unemployment. The share of social spending in total government expenditure has trended upward in most OECD countries,