How many economists see government

I have seen economists termed “growth fatalists” for the fact that we don’t believe that there is much government can do to change underlying economic fortunes.  Greg Mankiw posted a quote that summed up the position well:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.

If I’m honest, I think that the belief that government can create growth magically stems from the fact that people want to feel like they have control of things – economic growth is something that impacts upon our daily lives that we have no control over, but if we can tell ourselves we have control it is easier to live our lives.

In the same way our forefathers would worship the sun, or a “god of the harvest” our modern society worships government policies that “will provide economic growth”.

Discuss 😉

  • post-1978 China? Post World War II Japan? Surely at least for developing economies, the role of government is important. I think that both cases provide good examples of when government economic policy is bad or doesn’t adapt to the broader socio-economic environments then economic growth was/is bad, but when suitable for the broader international and domestic environments, the policies were a success. So I guess we are comparing “good” government policy with “bad” one – not just government intervention with a lack of government intervention (which of course can be dubious – ie the Clinton economy – how do we know it was good policy?). Of course, in these two examples, the good and the bad policies are in reverse chronological order.

  • Miguel Sanchez

    To be a bit more precise, I’m fatalistic about government’s ability to create growth using measures that are deliberately aimed at creating growth.

    Governments can do a lot to create a helpful (or harmful) environment for the economy to grow, e.g. securing private property rights is the classic example. But in these kinds of areas there’s rarely a short-term payoff that can be linked to the policy, so they tend to be ignored when it comes to these nearsighted debates about how we can “create” growth.

  • @sigma1

    @Miguel Sanchez

    Good comments guys.

    In my opinion, a government can promote growth by laying down certainty and the right sort of institutions – you guys raised the same point, which I’m glad to see 😀 .

    Where I think we get lost when thinking about public policy is when we think about the “marginal” benefit of government policy.

    Oft times, the “marginal” policy is going to do nothing for growth, in fact it might reduce it. As a result, we need to actually sit back and look at the policy in context – ask what the costs and benefits are, and ask if this is a cost society is willing to bear for that benefit.

    Appealing to a policy because it is a “growth” policy oft times just means that the person trying to sell the policy can’t do it on equity or efficiency grounds, and is trying to find a way to market a policy they want to sell 😉

    One other thing – when looking at countries like China and Japan, we know that they grew from a position well below other countries (which is to be expected, as they had the same technological stock). Furthermore, Japan kept growing – due no doubt to a culture of savings and investing. However, does this higher growth imply that they had higher levels of satisfaction? Does it imply that the society they lived in made them happier? Often people will sell growth as the sole root of happiness – but if government policies promote growth by restricting choice there is a trade-off, a trade-off that really needs to be faced.

    That is why I’m so anti compulsory super (just for a wild digression)

  • @Matt Nolan There is a saying in the public service along the lines of something being a “solution looking for a problem” that is sometimes used to discredit over eager policymakers. Of course in my experience, it can be used to good effect by captured, I mean, er, “senior” bureaucrats against their junior ones, often pettily so 🙂

    As for the China/Japan point you raised, recent experiences would seem to suggest otherwise. After the 100 years of humiliation at the hand of Western/foreign powers, and then 30 more years of misery of their own making, Deng Xiaoping seemed to masterfully pacify the population with economic growth from 1978 onwards. The strategy even now is that economic growth is the “ultimate solution” (exactly that expression too) to much of what ails people in Chinese society.

    In Japan, after a tumultuous period in the late 50s and an anti-US student movement lasting into the early 60s, the LDP and PM Ikeda had their/his back to the wall….and then he came out with his famous income doubling plan (designed to take 10 years – and achieved ahead of time – how often does that happen these days? 🙂 ) Many scholars have suggested this enabled the LDP government to consolidate its power, and bed down the alliance with the US and the stability that has brought and is still bringing to that part of the world . Many believed things could have gotten ugly for the conservative government and US-Japan alliance without this growth.

    That said, I am ideological predisposed towards your view. But we have take into account development stage, and culture and history. In contemporary China people are both more “free” and wealthy than they have been in 200 years probably (relatively speaking). After 170 years of going backwards or proceeding in a one step forward, two steps backwards kind of way, people were probably very happy to see China going forward consistently. Likewise for Japan after a miserable 30 years (much of their own doing, but not all) until the 1950s.

    Perhaps you could argue that economic growth makes people happy when it is associated with a vibrant and progressing and stabilizing dynamic in society, when that has been absent for a long time. Perhaps economic growth enabled by a specific and conscious government grand plan is valuable not so much for its adding monetary value to peoples’ balance sheets, but because it gives society a connecting focus other than war when such a focus is needed.

    Which is why I do ultimately think that in post-modern/neo-liberal Western societies “economic policy” for the most part rings hollow. If states such as ours just explicitly concentrated on removing economic distortions (cf taxation and property, telco competitiveness, RS&T) rather than trying to engineer economic growth, I think we might take them more seriously.

  • @Sigma1

    Hi again Sigma1,

    The key thing for me is the lack of a counterfactual in these cases – when Japan/China set up the institutional situation for growth at the same time they set up “active” policies. As a result, I don’t think we can disentangle the two – and people are then willing to say the growth was the result of policies rather than the institutional framework.

    10% growth pa seems like it HAS to be caused by something, but with the right institutional framework and sufficiently low GDP per cap, I can’t see why we have to give credit to active policies to explain this growth.

    Also, I would be loath to deny the fact that a government could stimulate measured growth by limiting other factors – such as the freedom of a group of people. In some ways China is a current case of this. Whether this is sustainable in the long-run is still an open question – and IMO even if it was sustainable I can’t see it as morally admissible.

    As you say, things are generally freer in China then they have been – but I can’t help but apply my standards for freedom when it comes to making some sort of judgment on where policy needs to head.