Thursday, January 15, 2009

Why government intervention works?

Here is Jeff Madrick:

However, it is possible to look at the question of regulation empirically rather than theoretically. One useful area is cross-country analysis, whereby economists look at how countries with bigger governments and higher taxes fare. In recent years, Peter H. Lindert, a leading economic historian from the University of California, Davis, has comprehensively analyzed the literature. One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, he found that studies claiming that high taxes reduce economic growth simply did not hold up.

Lindert’s exhaustive statistical analyses were based on eighteen countries over ninety years. No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending. There is a dramatic “conflict between intuition and evidence,” he writes. “It is well-known that higher taxes and social transfers reduce productivity. Well-known—but unsupported by statistics and history.” And he goes on: “Neither simple raw correlations nor a careful weighing of the apparent sources of growth shows any clearly negative net effect of all that redistribution.”

These days we all know how easily statistical analyses can be rigged. But if the case against big government were open and shut, then there would not even be a debate among economists. As Lindert notes, if a dollar of social spending reduces GDP by, say, sixty cents, then why are so many European nations doing well? They spend 25 to 35 percent of their national income on the poor, the elderly, the sick, and the unemployed, which therefore means, according to anti-government economists, they must have reduced their GDP by 15 to 20 percent. In other words, if they simply eliminated this spending, they would all be as rich or much richer than the United States, even as their people work many fewer hours.

Very interesting article. Read the full article to get some Kurgman and Stiglitz flavor!! Madrick is the author of a new book The Case for Big Government

On a similar note, here is what 2009 looks like for international development:

Markets and the State are already being rebalanced to fit these new times. It is time to say exactly who governs what, why, when and how. This will not be easy, but those who have been clamouring for more state involvement in development will also have to deliver better state involvement. This will be a big debate in 2009 with questions around (a) the appropriate balance of regulation, stimulus, and the provision of missing goods and markets, (b) how the balance is identified and (c) how the activity will be paid for. These debates must yield concrete actions very quickly.

...2009 will see: new ways of thinking about how the state and market can work together to encourage sustainable behaviour; new ideas influenced by the idea of wellbeing and what constitutes ‘consumption’; new ways of coordinating donor financing to generate new technologies; fresh perspectives on justice and accountability; novel ways of listening and reconciling ideas from around the world; and a more serious effort to understand everyday attitudes to international development.