Effective Government

Tying together yesterday's post on the economy of Iceland with Thursday's musings on the difficulty of promoting the rule of law, I thought I might lay down my general theory that I think the basic ideological debate between the partisans of the free market and the partisans of social democracy actually has relatively little to tell us about macroeconomic growth issues.

The biggest difference you see around the world is, by far, not one of government policy but of government efficacy. Less important than the differences in what the rules say, in other words, is the question of how the rules relate to the real world. In some places, you have highly-functioning states where the rule of law is effectively enforced. In other places, the formal state has almost no capacity, so in practice people are under the thumb of warlords or criminal gangs or what have you. Macroeconomic policy advice that's perfectly reasonable for a large, resource-rich, ethnically diverse country like Canada is going to be completely useless in a large, resource-rich ethnically diverse country like Congo and that's true no matter what your perspective on what Canada ought to do.

At the end of the day, even a very market-oriented state is being given an awful lot of powers. It has police, prisons, an army, navy, air force, along with a central bank, rules about broadcast media, where roads and airplanes go, some subsistence provision for the poor, etc. That all on its own is perfectly adequate power to ensure that if the state is administered incompetently, corruptly, or abusively that there'll be all kinds of terrible consequences. Conversely, you see in Iceland or Denmark that when you do have a well-governed state all kinds of additional public services can be provided in a very helpful and constructive way. The main independent variable in the success (or lack thereof) of different kinds of polities, in other words, probably isn't the policies so much as the presence or absence (or scope) of a certain quality of "good government" that we don't understand much about.

Comments

Actually we do know something about good government -- check out Bob Putnam's book, "Making Democracy Work: Civic Traditions in Modern Italy." It's a compelling study that demonstrates how rhe civic-minded populace in Northerh Italy gets better government than the isolated, fearful one in the south (Sicily). He followed it up with "Bowling Alone," which explains poor government in the U.S. -- the collapse of our civic traditions. His point is that civic institutions aren't limited to political parties but include bowling leagues and singing groups.

Posted by Leslie Miller | February 23, 2008 10:44 AM

Denmark is anomalous enough, but using Iceland as an example for anything to do with the United States is just silly.

Posted by SAO | February 23, 2008 10:47 AM

"The main independent variable...isn't the policies so much as...a certain quality of good government that we don't understand much about."

If you've already ceded "good government" as something other than an oxymoron, you've gone too far. Let's agree on "minimal government".

Posted by Robert Powell | February 23, 2008 11:06 AM

Of course. I agree, but in deference to Dani Rodrik I would say that there is One Economics and Many Recipes.

What do you with a place like China? It has a certain level of governing competence, so should it accept the Washington Consensus? Or should it figure out a way to modify what it has to better reflect market fundamentals in a sui generis way or just do what the US Treasury says it should. I would say the former, and, to the credit of a lot economists, they are starting to agree.

Posted by David | February 23, 2008 11:06 AM

Robert Powell:

Typical libetarian/conservative nonsense. You want minimal government go to Somalia. There isn't any government there to inhibit any of your freedoms. No taxes, no regulations--its paradise. I wonder why the WSJ editorial board doesn't move there.

Posted by David | February 23, 2008 11:11 AM

If you've already ceded "good government" as something other than an oxymoron, you've gone too far. Let's agree on "minimal government".

Circumspection would discourage most who fail to read or understand a post from commenting upon it, but for those with poor impulse control we have Mr. Powell here to provide a teachable moment.

Posted by DMonteith | February 23, 2008 11:23 AM

Re: circumspection....

Wanda: To call you stupid would be an insult to stupid people. I've known sheep who could outwit you. I've worn dresses with higher IQs, but you think you're an intellectual, don't you, ape?

Otto: Apes don't read philosophy.

Wanda: Yes they do, Otto, they just don't understand it.

Posted by David | February 23, 2008 11:30 AM

Sounds like Fukuyama's scope vs. strength piece.

Posted by Kid A | February 23, 2008 11:43 AM

As Pope said,

"For forms of government let fools contest;
Whate'er is best administer'd is best"

This ties into one of my complaints about Right --they keep attacking both faith in government and the rule of law. Too of that and we'll wish we were in Somalia.

Posted by Barry | February 23, 2008 11:44 AM

Barry, what's funny is that this ties into one of my complaints about the left in the US: they keep thinking that the US is just like Europe, so if something works OK for a European state, it of course would work well here.

Posted by Thomas | February 23, 2008 11:58 AM

That's
"Too much of that and we'll wish we were in Somalia."

And Thomas -- you could well be right in some cases; clearly, seeing that something works in Europe isn't proof that it would work here, though it suggests that it could, and might be worth testing. Also -- I think the Left does its part in undermining faith in government (though mainstream liberals tend to be more cynical about the corporate world than government).

Posted by Barry | February 23, 2008 12:16 PM

of course one of the hugest differences between the US and Europe when it comes to government is that in Europe, corporations aren't given the legal rights and statuses of citizens. In the European model, the interests and welfare of non-corporate citizens is actually something that matters to the government, as opposed to the care of the interests of those corporate "citizens" who have the most money and influence here.

I've often assumed that the strength of the libertarian and government hatred movement is so strong out West because for many many years the state governments of many of those states were basically just bought and paid for appendages of the whatever large corporation dominated the state (think the aluminum and copper interests in Montana, for example). When government shows that it has little interest in the people and at its core functions corruptly at best, of course people are going to have a poor opinion of it. But that doesn't mean that good responsive government isn't possible.

Posted by Ethel-to-Tilly | February 23, 2008 1:01 PM

I'd strongly second Matt's general analysis here...

But an important corollary of this is the importance of analyzing the "robustness" of a particular governmental/social structure. Basically some systems tend to work better across a wide range of social situations than others.

For example, this is a pretty valid criticism of both e.g. doctrinaire administrative socialism and doctrinaire free-market libertarianism. For example, putting lots of crucial services up for periodic bidding to private contractors only makes sense if you assume the contractors won't simply corrupt the system and use their effective monopolies to gain extortionate rents from the society (e.g. Enron).

This may be true in a very limited number of incorruptible societies but is hardly more plausible than simply assuming that the all-powerful Philosopher-King will always act in the best long-term interest of his people.

Furthermore, since libertarianism is fundamentally based on the (incorrect) assumption that human beings are always profit-maximizing greed-engines, it's unclear why this wouldn't also apply to the contractors or contract-administrators.

Posted by RKU | February 23, 2008 1:18 PM

Technocrat!

Posted by Korha | February 23, 2008 1:46 PM

Matt, this is progress. Now connect the dots to some key related issues -- affirmative action versus meritocracy, ethnic homogeneousness versus diversity -- and see where that takes you. Why might government services be more effective in Scandinavia or Japan than in the U.S.?

"of course one of the hugest differences between the US and Europe when it comes to government is that in Europe, corporations aren't given the legal rights and statuses of citizens"

Ethel-to-Lilly,

In Europe corporations arguably are more protected by governments, because those governments often own a significant stake in them. As I've written here before, a shareholder in, say, France's Total has less to fear from the French government than a shareholder in ExxonMobil has to fear from the American government. Every election year in the U.S., the left acts as if the corporations that we own (either directly or through pension funds) -- the same corporations that provide the products and services we want, the jobs we need, and the tax revenues our government needs -- are somehow the obstacle to prosperity in America. I'd bet voters in Europe hear less of this lunacy about Total and their other major corporations.

Posted by Fred | February 23, 2008 1:48 PM

I think that cultural factors play a strong role. While there are exceptions, Scandinavians are practically unbribable; if you try it the attempted bribee will be insulted, will report you, and you'll be arrested. At the other extreme there are countries where you can't get anything done without bribing minor officials at every step of the way. In some cases, cracking down on bribery in bribe-prone cultures is a problem because the government pays petty officials practically nothing, and income from bribes is what they live on.

Posted by Joe Buck | February 23, 2008 1:52 PM

No, David. Somalia is sub-minimal government. Every time someone questions Statist basic assumptions the straw men proliferate.

Matt's best point here in my view is "...even a very market-oriented state is being given a lot of powers." I not authorized to speak for Libertarians, but all the thoughtful ones I know mistrust big corporations as much as they do the state, especially when they're linked with the kind of swinging-door management that characterizes most of the big players. Big corporations, like big government, hate competition.

States that manage to maintain reasonable levels of individual human rights and rule of law tend to prosper. This is not a radical concept. Within limits, libertarianism is pragmatism.

Posted by Robert Powell | February 23, 2008 1:57 PM

"Every time someone questions Statist basic assumptions the straw men proliferate."

That reminds me of a rhetorical trick Mario Cuomo used to use (for you whippersnappers out there, find the video his Democratic National Convention speech. If you think Obama's a good orator, Mario was even better). When Cuomo was questioned on some of his statist ideas, he would say something like,

"Look, we can't all have our own army. So there are things we need government to do"

Which is of course true. But the argument over the proper role of government isn't over the functions that every reasonable person agrees should be the province of government (e.g., defense, enforcing contracts, police power, etc.); it's over the functions that can be performed by government or by the private or not-for-profit sector. For example, most Americans (I think) are content with the current status of utilities as (somewhat heavily) regulated, publicly-traded companies. Cuomo wanted the state of New York to take them over.

Posted by Fred | February 23, 2008 2:20 PM

Robert Powell:

You may be arguing in good faith. But mentioning Somalia is hardly responding to a strawman argument.

I mean you said this: "If you've already ceded "good government" as something other than an oxymoron, you've gone too far. Let's agree on "minimal government"." In any case, I don't agree, and it reminds me of this:

http://www.nationalreview.com/murdock/murdock030102.shtml

"States that manage to maintain reasonable levels of individual human rights and rule of law tend to prosper. This is not a radical concept. Within limits, libertarianism is pragmatism."

Right, but maintaining reasonable levels of individual human rights and rule of law is accomplished in states like Sweden, Denmark, and Germany--hardly libertarian paradises.

Posted by David | February 23, 2008 2:30 PM

Fred:
I don't get where you come off thinking that Democrats think corporations are evil. The thing that a lot of Democrats agree on is the need to regulate some industries and then enforce that regulation(see the banking sector/mortgage crisis). If a company is going to give out no-doc loans, what do you expect people to do? Are no-doc loans a smart thing? No, they aren't. Why were banks and lending companies even making them? Libertarianism works great in some Utopian society, but the real world is not Utopia.

Posted by Joe Klein's conscience | February 23, 2008 2:44 PM

Joe Klein's conscience,

"I don't get where you come off thinking that Democrats think corporations are evil."

I wouldn't say all Democrats think that, but there is a significant amount of hostile rhetoric about corporations coming from the Left, particularly during election years.

"The thing that a lot of Democrats agree on is the need to regulate some industries and then enforce that regulation"

Every serious person in both parties agrees that some level of government regulation is necessary. It's a straw man argument to suggest otherwise.

Since you bring up the mortgage business, you should acknowledge that certain government regulations and policies were a contributing factor; specifically, regulations and policies designed to spur lenders to extend more credit to low-income, minority borrowers, and to increase the rates of home ownership despite the dubious economic benefits to low-income owners (never mind the enormous and role the government plays in creating a market for mortgages with is GSEs). Do some research on this: starting about 16 years ago, the lamentation was that these marginal borrowers weren't given enough access to credit. Now the complaint is that they were given too much.

As for "no doc" loans specifically, these actually served a legitimate purpose at one point: they were meant for self-employed borrowers who had the resources to handle the loan, but didn't have the documentation that salaried employers have. They were of course misused by dishonest borrowers and lenders during the recent boom.

Certainly it is worth revisiting the regulations dealing with the mortgage business, but we should resist rushing to enact regulations that will do more harm than good, particularly when the market has already (at least for the foreseeable future) obviated the need for such a regulatory solution, e.g., there is no epidemic of "no doc" loans being given out to unqualified buyers right now. With government regulations, as with medicine, the motto should be, "first, do no harm". Regulations should also be designed to deal with potential future problems, not just the problems of the past. Closing the barn door after the horses have run out may make good electoral politics but it can lead to bad policy.

Posted by Fred | February 23, 2008 3:16 PM

David--wait, YOU brought up Somalia, right? What Fred said. Flippant remarks about oxymorons aside, I think I'm on really solid ground in asserting that we could do with substantially less government, but then we're not the one's who really suffer.

In much of the Third World, the motivation for going into government service is usually being able to steal more efficiently. Generally speaking, the poorer the country, the more regulation of and interference with the ability of the people to run small-to-medium sized businesses. Basically stable, homogeneous, and incorruptible states like those of Scandanavia are very big on individual rights, and have been getting much more business-friendly over the last decade or so.

conscience--No-doc loans are not a smart thing. So why should the government use tax money to bail out those who make them when they don't perform? Or for that matter, those who take out loans they can't afford to repay? Experience is a great regulator.

Posted by Robert Powell | February 23, 2008 3:22 PM

Matt writes:

"The main independent variable in the success (or lack thereof) of different kinds of polities, in other words, probably isn't the policies so much as the presence or absence (or scope) of a certain quality of "good government" that we don't understand much about."

What Matt is hinting at here is the Ultimate Heresy: that, in the performance of a society, people matter as well as policies; that Iceland can have statist policies and Estonia more free market policies and they'll both do better than numerous other countries with less of what economists call "human capital," no matter what ideologies those other countries try.

Obviously, some ideologies are simply disastrous -- thus the North Korea - South Korea example. But since the end of the Cold War, awful ideologies are becoming less a driving force in global differences and human capital differences more important.

Posted by Steve Sailer | February 23, 2008 3:30 PM

Robert Powell:
I never said that governments should bail them out. On the contrary, they shouldn't. We all know they will though. Why do you think Bernanke has been lowering rates and having those weird Fed auctions for? As far as regulation, it is funny that those Libertarians argue about how bad government is when one of your own(Greenspan) helped make the mortgage mess. Also Fred is missing something. There are some who'd say the repeal of the Glass-Steagall Act helped contribute to our current mess. So that was an example of something that didn't need repeal(but Wall Street wanted it so it got it). And Fred, if you are gonna loan to marginal borrowers aren't you gonna want to make sure you get paid back? You aren't going to loan them wildly obscene amounts that they have no hope of ever paying back.

Posted by Joe Klein's conscience | February 23, 2008 3:42 PM

Matt says:

"Macroeconomic policy advice that's perfectly reasonable for a large, resource-rich, ethnically diverse country like Canada is going to be completely useless in a large, resource-rich ethnically diverse country like Congo and that's true no matter what your perspective on what Canada ought to do."

Indeed.

Posted by Steve Sailer | February 23, 2008 4:32 PM

"There are some who'd say the repeal of the Glass-Steagall Act helped contribute to our current mess."

The Glass-Steagall repeal certainly gave commercial bank/investment bank conglomerates like Citigroup more rope, which Citigroup* used to hang itself, but I think it's more likely that, all things being equal, we would have had the same debacle even if President Clinton hadn't signed the Glass-Steagall repeal into law. The difference would have been that different players would have been effected: instead of investment banks and investment bank/commercial bank conglomerates taking hits on complex mortgage-backed securities, it would just be the investment banks. I don't see how that would have made things much different upstream, at the mortgage origination level.

*In Citigroup's case, there was an obvious lack of management and oversight. The CEO had no relevant risk management expertise, and one guy who did, former Goldman chief and U.S. Treasury Secretary Bob Rubin, couldn't be roused from his eight-figure sinecure to pay attention.

"And Fred, if you are gonna loan to marginal borrowers aren't you gonna want to make sure you get paid back? You aren't going to loan them wildly obscene amounts that they have no hope of ever paying back."

This question suggests you don't understand the basics here. Sure, if you are a traditional bank mortgage lender, you are going to be wary about giving mortgages to bad credit risks, since you'll get stuck with the house otherwise (you'll also be less likely to give a mortgage with low or no down payment, because that would remove any margin of safety if you have get stuck with the house and have to sell it.). Most of the problems with mortgages to marginal (and often, dishonest) borrowers weren't originated this way though. They were originated by mortgage companies that promptly turned around and sold their loans (these loans were then pooled together and securitized into mortgage-backed securities, which in turn were packaged into more complex instruments). So by the time the mortgage borrower defaulted, it was no longer their problem.

It became a problem for these stand-alone mortgage companies when the securitization market completely shut down and no one would buy their loans. Many of these companies -- even the scrupulous ones -- subsequently went bankrupt when they couldn't sell their loans.

Posted by Fred | February 23, 2008 4:34 PM

To explore further Matt's comparison of Canada to Congo, this points out that a key to maintaining the right conditions for good government in the future is a sensible immigration policy.

Canada has a very different immigration philosophy than the U.S. In contrast to America's misty-eyed sentimentalism, Canada's is explicitly based on the premise that the purpose of Canada's immigration policy is to benefit current Canadians. Thus, Canada screens immigration applicants and only admits high human capital candidates who are likely to make life better for current Canadians. Thus Canada would never allow the average Congolese to immigrate to the Canada (although high human capital Congolese are welcome). In contrast, important elite elements within the U.S. favor allowing the average or subaverage Mexican to immigrate here, laws be damned.

Posted by Steve Sailer | February 23, 2008 9:16 PM

Steve Sailer,

Regarding your last comment, the political reasons for our current immigration situation are fairly clear (GOP business owners' desire for low wage workers and Democrats' desire for more eventual voters dependent on them for transfer payments). Have you considered how Canada (and other first world countries with similar immigration policies) have managed to avoid the confluence of political interests that has given us our system, which favors immigrants with low levels of human capital? Are restaurant owners and landscapers in Canada less politically active, or do they have less of a need for low-wage laborers? Are Canadian leftists less interested in padding voter rolls with immigrants who will reliably vote for their policies?

Posted by Fred | February 24, 2008 12:05 AM

I just want to mention that people often talk past each other when discussing "rule of law."

Small-government advocates, often saying that government only needs to provide X, Y, and rule of law, are generally talking about property rights and security. People can't steal your stuff or invade your home. What they really mean, I think, is Law and Order.

The actual meaning of Rule of Law, as I understand it, is in contrast to rule of men. IOW, the rules are written down, everyone agrees what they are, and the powers that be can't game them, so they're not used arbitrarily. (Matter of degree, or course.)

Both are (damned) important, of course, and somewhat overlapping. But better discussion might emerge if we took care to distinguish more carefully between the two.

Hmmm. I should do a post on that...

Posted by Steve Roth | February 24, 2008 1:25 AM

Canada's Liberal Party has long wanted a high rate of immigration because immigrants vote Liberal on average. As Bertolt Brecht asked the East German state, rather than the people electing a new government, perhaps it would be more convenient for the government to elect a new people.

As for why Canada has wants high-quality rather than low-quality immigrants, that's kind of like asking why do Canadians live indoors? Because it's common-sensical. It's the American immigration philosophy that needs explanation.

Posted by Steve Sailer | February 24, 2008 2:46 AM

Steve Sailer,

It would seem that with plenty of high-paying jobs for blue collar workers available in Canada's energy sector restaurant owners etc. might complain that no one wants to be a busboy. How do they manage to fill these jobs without illegals? Do they offer wages high enough to attract Canadians?

Posted by Fred | February 24, 2008 11:45 AM