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Saturday, 19 May 2012

BIG GOVERNMENT JUNKIES, Y U NO WANT REFORM?


Some time ago while trying to get to the bottom of how big the Greek public sector really is, I made the point that electorates will only tolerate larger public sectors if they are efficient. This is not a political point: it's a statement about voting behaviour. In the long run, voters will not long tolerate a state that wastes their money, and rational voters will only pay for public spending if the returns to public spending are good relative to those of private investment. 

It's not too hard to demonstrate this: first of all we know that the public sector is more efficient in democratic countries. That suggests there is some mechanism (very imperfect, I'm sure) through which voters punish state inefficiency. I can think of two ways. 

First, they do it by punishing governments with a recent record of over-spending. Second, they undermine the tax revenue of inefficient governments by either evading/avoiding tax or joining the informal sector through informal work or enterprise, forcing them to either cut down on spending or run deficits. Third, the low levels of public capital accumulation produced by misdirected spending result in sluggish economic growth and hence higher unemployment and lower government revenues in the long run; so even if they can't directly see the source of this malaise, voters who hate unemployment, economic stagnation, and burgeoning deficits will punish politicians for it. 

The last two mechanisms are quite important actually: government inefficiency will tend to undermine government revenues and create deficits on both ends. People should remember this when they say that it was Greece's tax revenues that were too low, as opposed to public spending being too high. Actually inefficient public spending damages both deficit drivers. All of this adds up to one thing: public spending can only rise sustainably in the long run if it's backed up by rising government efficiency. At the urging of @paslanid I've collected some data to back this claim up, and incidentally I've got some surprising insights for you. Sources are the WEF's Global Competitiveness data and Eurostat's annual public finances data.



The first insight from the above is that small, efficient public sectors are not to be found where you might expect. Iceland and Norway, Estonia and Luxembourg, and of course Germany are not known for libertarianism but they manage to run a tight ship without a massive state. Britain, which many in Greece think is America-light, is actually a fairly big state and not terribly efficient. Same goes for Ireland, actually, although rising unemployment in the past years will no doubt have pushed primary spending up a lot further than expected.

The second insight from the above is that perceptions of public efficiency can change dramatically when a country is under pressure: perceived efficiency levels could explain the size of the Greek state in the good old days - 2005-2008 - or at least why the electorate tolerated such a large state. But of course with government lying to us about its spending and many people (even in, or perhaps especially in, our corporate and academic elites) having made peace with the terrible inefficiency around them, it's not clear how accurate early perceptions were. It certainly doesn't help that in the meantime public investment has been cut savagely, rebalancing spending further towards public consumption.

But most of all the data bear out the general hypothesis that inefficient public sectors are unable to stay very large for very long. Do you want a big state? Then you should be busting your balls to make it more efficient. I won't support you but the average Joe will. So why is no one in the big government camp arguing for more efficiency? Sure it will mean firing some public sector employees in the short term but it will probably mean that more can get hired in the long run.

2 comments:

  1. Do you really think that the general public will see a large public sector as a threat after this mess? I am sure some will see it as a stabilising factor.

    ReplyDelete
  2. I think everyone hates a wasteful public sector. And wasteful public sectors will not be able to grow larger. That's all.

    ReplyDelete

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