If we re-elect President Barack Obama, we will be endorsing a more progressive government with more social insurance, higher tax rates at least on the wealthy and more regulation. If we elect Mitt Romney, we will be returning to our post-Ronald Reagan norm of embracing low taxes, economic freedom and widespread economic disparities.
I am an economist, University of Chicago-trained, and I believe in the economic power of unfettered human ingenuity. At its best, limited government can produce a torrent of entrepreneurship that brings great wealth and opportunity. In the 30 years after Reagan was first elected, real per-capita gross domestic product in the U.S. increased 64 percent.
In purchasing-power parity -- an indicator of price-level differences across countries -- the U.S. adjusted per-capita GDP is dramatically higher than any other large nation’s. It is 28 percent higher than Germany’s and 38 percent higher than France’s.
American StrengthsThe U.S. looks good by comparison when the International Monetary Fund adjusts for purchasing-power parity because American entrepreneurs from Sam Walton to Jeff Bezos have made our nation a bargain hunter’s haven. The work of Enrico Moretti, an economist at the University of California, Berkeley, finds that due to relatively low and stable costs of living in American lower-wage areas “the increase in well-being disparities between 1980 and 2000 is smaller than previously thought.”
In 2011, our ratio of total government spending to GDP was 41 percent, which remains low by the standard of other wealthy countries. This is still 7 percentage points higher than it was 10 years ago. Forty-one cents of every dollar still seems like a lot.
Since cutting taxes is a lot more fun than cutting spending, I fear that a return to Republican rule will mean bigger deficits, not smaller government. From 1980 to 1992, the ratio of the federal debt (held by the public) to GDP increased from 21.7 percent to 43.3 percent, and the debt-to-GDP ratio also rose under President George W. Bush. Voters who want smaller government, as opposed to just passing the price of public spending on to their children, should push Romney to be far more specific about spending cuts.
Moreover, legitimate advantages can come from big government. The U.S. is a very unequal society, and that seems unlikely to change with less government. Although the new health-care law still splits the nation, Medicare is profoundly popular. Eighty-five percent of Americans want more regulation of Wall Street, which is understandable since they have seen financial risk taking lead to substantial public bailouts.
Most important, our schools will get worse, not better, if we stop using federal dollars to encourage better teaching and more charter schools. A new report by my Harvard colleague Paul Peterson, along with Eric Hanushek and Ludger Woessmann, examines U.S. test-score gains and finds them “middling, not stellar.” Yes, they found that “the performance of 4th-grade students on math tests rose steeply between the mid-1990s and 2011” and that “24 countries trail the U.S. rate of improvement.” But, they note, “another 24 countries appear to be improving at a faster rate.” The report also highlights the continuing disparities across states, which will only expand if the federal government backs away from education. We are far from becoming world leaders in human capital.
Europe’s ModelsPresident Obama may stand for a more European approach to government. In that case, we had better be sure that we are going to become Germany and not Greece. The examples of Germany, the Netherlands and the Nordic countries show that robust economic performance can be combined with a sizable welfare state, but the current disasters in southern Europe remind us how easily big government can go awry.
What separates the well-functioning social democracies from the basket cases? For economies to function, despite high taxes and generous redistribution, regulation must be limited, and tax systems must be sensible and fairly flat (such as value-added taxes). Public spending, especially on education, must be reasonably effective.
Every big government makes mistakes -- generous public pensions that start at young ages, subsidies that pay farmers to leave fields fallow, unlimited health-care promises. Effective governments are able to abandon mistaken policies that imperil society, even against the powerful opposition of the favored few who benefit from the programs.
Sweden may be the most obvious example of a social democracy that went too far and reshaped itself. In the early 1970s, Sweden was an economic rock star, but its overregulated, overtaxed economy lost ground in the 1970s and 1980s and experienced a crisis from 1990 to 1993. The country responded with significant reforms, deregulating, privatizing pensions and moving from vast deficits to budget surpluses. The reforms weren’t easy -- previously favored companies and workers lost out -- but the good of the country triumphed over the good of particular interest groups.
By contrast, Greece is an example of interest-group dominance enforced by rioting. The country’s labor markets are too rigid. Its public pensions are too generous. Its tax collection is ineffective. As the Organization for Economic Cooperation and Development puts it, “Control over government spending needs to be strengthened by improving administration, reducing the public sector wage bill, and more strictly controlling public entities (including in the health system) and loss-making state enterprises.” Every Greek problem started with a policy that benefited some powerful interest group; solving Greece’s problems is hard because those groups still hold outsize power over the polity.
Ban BoondogglesWhere does the U.S. sit on the spectrum between Sweden and Greece? Are we good at ending poor policies that favor powerful lobbies, or are we more like southern Europe, unable to reform programs that have powerful friends, no matter what the cost? Our divided political structure produces a legislature filled with people who need strong allies to get re-elected but who are not held accountable for the state of the economy. That is a recipe for interest-group dominance.
If Obama wants a bigger government, he must make the case that his administration can cut bad programs as well as increase spending. If he proposed a serious plan to cut Medicare costs, he would increase his credibility as a champion of the whole against its parts. If he wanted to convince us that public-works projects can be sound investments, not boondoggles, he should have rejected the recent highway bill that uses $18.8 billion of general tax revenue to subsidize highway drivers in low-density states.
A strong, free-market economy, with balanced budgets and a small but solid safety net, is distinctly attractive. There are also things to like about countries with bigger, well-run public sectors. But the real question to ask about our options in November is which vision will be less bad when it collides with reality.