That's one extreme.

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What Do Rich Countries Have in Common? Big Government

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Today’s conservatives are almost universal in their insistence that big government is bad. Libertarian intellectuals, who drive much of the elite opinion in the conservative movement, will attack the state from any possible angle. And economists, in the past, have sometimes provided the theoretical firepower for those libertarian ideas, making models where markets handle everything in society, and government can only bog things down. My old macroeconomics teacher, Chris House of the University of Michigan, once declared that the economic facts lean to the right. 

But even if House were correct -- and I think there’s a fair amount of evidence against his claim -- there’s a big problem with his observation. It only holds locally. If you do an empirical study and you find that more government bureaucracy is bad for the economy, what you’ve found isn't that this is true in general -- only that it’s true at one particular moment in time. 

If you think about it, it’s easy to find cases where government is too big. That doesn’t mean it’s too big in every case, and should be “drowned in the bathtub,” as anti-tax activist Grover Norquist would have it. Look at this chart from the Organization for Economic Co-operation and Development showing government spending as a fraction of gross domestic product among rich countries: 

Or look at how U.S. total government spending has grown as the country has become richer and richer:

Are we supposed to believe that rich countries are rich in spite of the fact that they all have big governments? Should we believe that government is a parasite that always, without fail, finds a host in the body politic of every single country that reaches first-world status?

Or should we conclude that big government is a necessary ingredient for countries to get rich? 

If you look at developing countries, including the U.S., there were probably many times when government was way too small. University of Oklahoma economist Robin Grier thinks that hapless Habsburg Spain was a case in point:

The great weakness of the Spanish government was not its bureaucratic nature, but its inability to build an effective bureaucracy until the 1700s. Without an effective bureaucracy…[r]ulers could not trust the market because they were incapable of taxing decentralized economic activity. 

One example of the lack of bureaucratic capability during the 1500s and 1600s is found in the example of Philip’s attempt to conquer England with the Spanish Armada. 

One downside of small government is that it can make you vulnerable to losing wars. This was the insight of Charles Tilly, a sociologist who theorized that interstate conflict provides the impetus for the development of useful bureaucracies. Tilly was no starry-eyed progressive. He likened states to mafia protection rackets, which were eventually forced to provide public goods that made their countries richer, in order to win wars. 

We can see how public goods make a country richer. One example would be infrastructure. Private companies have trouble building railroads without government help securing the land corridors. During the Civil War, both sides built railroads to aid in movement of troops, weapons and supplies. The Union built a lot more, and this proved to be very helpful in winning the conflict. But railroads also gave a big boost to economic development after the war, since they allowed the easy transportation of goods and people from place to place. 

Are these just isolated historical examples? MIT economist Daron Acemoglu says “no.” According to Acemoglu -- who is one of the most respected economists in the business, and who specializes in development and growth economics – it’s weak states, not overbearing ones, that hold back growth in much of the developing world.

Acemoglu marshals an impressive array of evidence in support of his claim. For example, he cites evidence that countries in Africa with a history of centralized tribal institutions are richer today, and research showing that countries with a longer tradition of big government developed faster. 

He then weaves a theory to explain the evidence.  The theory isn't very complicated, and relies on the simple idea that public goods boost economic activity. Governments that are more effectively able to tax and regulate economic activity -- an ability that Acemoglu calls “state capacity” -- are able to provide more public goods, and therefore to outgrow countries with weak states. 

In other words, big government is good -- up to a point. And people know that big government is good, so they allow it. This is what Acemoglu calls a “consensually strong state.” If you look at the history of the U.S., Western Europe and Japan, you see that voters have again and again chosen leaders who are willing to expand the scope of government. The Grover Norquists of the world have usually lost their battles, and the protests of the Chris Houses have fallen on deaf ears. The voters have sided with Acemoglu.

Of course, government can get too big. Acemoglu’s model allows for that too. But too small and weak a government can be just as bad as a big one. As conservatives continue their attempts to slash the American state, we should keep that in mind. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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