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Larry Summers: government is guaranteed to grow

Summers' ode to an ever greater government is based on circular reasoning

Larry Summers wrote a piece to The Washington Post and Financial Times that made me ROTFL:

Government we can't afford (full text, free, titles differ)
See also a response in The National Post which only reviews the article and says "a dramatic change is what the Tea Party wants".



Summers says that no matter who wins in the U.S. presidential elections, America's public sector will continue to increase as the fraction of the GDP.




This man wasn't sufficiently left-wing for Harvard; I can't believe what I apparently remember about the politics at Harvard, it sounds completely insane to me today.

His arguments why the growth of the government shouldn't even be wrestled with stands on four legs:
  1. A third of the federal budget pays for people above 65 years whose fraction will go up
  2. Interest rates and the interests from the debt will go up
  3. Although products get cheaper, services paid by the state are getting more expensive
  4. Suspension of investments into infrastructure isn't sustainable in the long run
For a person who is totally brainwashed by the breathtakingly arrogant Big-Government left-wing propaganda, these comments may make sense. But if you're not brainwashed, you can't avoid noticing that Summers talks like a spoiled brat who says that he will need an increasing amount of gummi bears to be bought as he will be getting fatter and therefore in need of an ever greater number of the gummi bears to sustain the increasing amount of fat all over his body.



There's of course an alternative solution Summers doesn't even dare to contemplate: to spank this spoiled brat and stop buying him gummi bears (or at least reduce them). It's kind of incredible that this apparently bright guy can't get this basic point. There is nothing desirable or healthy about the spoiled brat's body to contain an increasing percentage of fat – much like there is nothing healthy or tolerable about a big government that devours a large and growing portion of the GDP.

But the undesirable trends won't stop automatically; someone must actually push them in the right direction. If we return to Summers' four points, they are four symptoms of the spoiled fat brat's high body mass index. Each of them actually has to be fought against.

Retirement age

A large and increasing percentage of the population is 65 years old or older. The primary reason is of course the increasing life expectancy which is actually a good thing, a result of healthier environments, less crippling jobs, and better and improving healthcare. But one must first appreciate that this trend is actually a good one. What does it mean to appreciate it? It means to publicly admit that as people are living longer, they are obviously also able to work longer. And to actually imprint this important finding into the policymaking.

The Czech Republic was the most socialized country of the Soviet bloc but there's no tangible opposition in my homeland to the trivial concept that the age at which people retire obviously has to gradually go up to solve the Summers' problem number 1. It's been agreed that the threshold to retire will soon reach 70 years; if I manage to live that long, it will probably be much higher than that for me. No one protests, perhaps with the exception of a few loons who are considered loons even by the unreformed Communist Party. It's completely obvious to everybody that a longer life is a proof that one is also capable of working longer. The percentage of the people who are expected to work can't be allowed to drop to arbitrarily low levels simply because the nation wouldn't feed itself and everyone is able to see this elementary point.

Summers' point 1 is therefore based on the implicit assumption that it must be a blasphemy to even suggest that the retirement could be postponed as people are getting healthier and more long-lived. Of course, once we are free at least to suggest, we know that the point 1 as a justification for a growing government is a complete fabrication. There doesn't exist any problem 1. The rules must be such that the percentage of the "productive population" simply never gets too low, it's kept in a healthy interval, and it's always possible to do so. If people were kept alive for too long but they wouldn't be able to live fully for a constant or increasing fraction of their lives, it would be a proof that it is counterproductive to keep them alive this long because they actually don't enjoy their life or mostly suffer for too long. If this were the case, the right response designed to make the people happier in average would be to shrink the budget for Medicare. If we decide it's not the case, it gives the policymakers a logical, waterproof justification to raise the retirement age.

At any rate, the fact that people are obviously getting healthier – as manifested by the increasing life expectancy – can't possibly be making the fiscal situation of a nation worse, can it?

Interest rates

Summers' decision to include the demagogic reference to the interest rates is an example of what the Jews call "chutzpah". He is using the expected rise of the interest rates as a justification of a growing government. Interestingly enough, just a year ago or so, he would use the low interest rates as a justification of policies to increase the government (and the debt ceiling), too. He would be saying that the interest rates were really low so no one needed to care about them and the government shouldn't be afraid to borrow ever higher amounts of money because things are OK.

Now, when it seems as though the era of cheap money is coming to its end anyway, he is using exactly the opposite observation to justify... the same policies to grow the fat spoiled brat known as the government, too. Why is he including all the irrelevant detailed numbers in his articles, pretending that they are arguments in favor of something, when it must be damn obvious to him that the true reason why he will advocate an ever bigger government is that he simply wants it, so he wants everyone else to believe that everything else must adapt to the "boundary conditions" that include the "fact" that the government has to be increasingly big? It's what I call demagogy.

It's also demagogy for him to say:
But for the next three decades the United States will confront the reality that major structural changes in its economy will compel an increase in the public sector’s fraction of the total economy unless the functions that the federal government has long performed are substantially scaled down.
The most inclusive, objective method to quantify "how many functions" the government is performing is to count the overall public expenses as a percentage of the GDP (I am sure that Summers would agree that the GDP is the most inclusive measure of the economic activity and I add it's a hypocrisy if he disagreed that the total public expenses don't analogously measure the total "amount of functions" that the public sector plays). If this percentage is growing, it proves that the government is performing an increasing number of "functions"; in that case, it's just copulating growing, isn't it? So Summers' proposition that the public budget fraction of the GDP has grow for the "number of functions performed by the government" to be fixed is tautologically false.

The true explanation is that politicians always have some power over the question how big the government is. They may invent various more or less silly or demagogic excuses for one kind of a decision or another. But it's their acts, their decisions about the budget and entitlements etc., that actually express the relevant information about the values. And make no doubts about it, if a government grows too big, the country in which it governs collapses or becomes unproductive. That's what happened – and is still happening – in Greece. That's what previously happened to the Roman Empire. That's what happened to many socialist countries. This key dynamics, namely commitments and entitlements increasing above a threshold that the nation may afford while staying productive and "in black numbers" – and not some flapdoodle about the climate or the environment – is the primary mechanism that makes empires, civilizations, and countries collapse.

So one may perhaps adopt some "Keynesian bias" and increase the spending when the commercial sector tends to do the opposite, i.e. when the private sector economy displays signs of a downturn. But this bias must still be used consistently. If the commercial sector starts to grow, the government must shrink itself again. If it loses the will or ability to move in both directions when needed, and it can only grow, then the government becomes the body fat that is gradually and irreversibly converting the whole organism into a fat pig that must be butchered because it's the only thing that can really be done with it. If (not only) Summers' fiscal philosophy remains unchallenged, Butchers China et al. Ltd. will perform this operation with the Pig America Unltd. in decades from now – and America will badly deserve it.

Again, the rising interest rates are a sign that the government has borrowed too much and they're also a natural, healthy, self-regulating negative feedback mechanism that is trying to "punish" the government for having spent so much and discourage it from continuing in this behavior. If you imagined an individual instead of the government, his reaction to rising interest rates would be obvious: he would stop borrowing too much simply because borrowing has gotten too expensive and he is afraid that the excessive debt and high interests will be crippling his future, or he may go bankrupt. That's one of the many ways in which the invisible hand of the free markets restores the balance. For a government to work properly, it must feel exactly the same things as the individual and it must respond analogously, too. If a government continues to spend like mad despite the fact that the interest rates are rising – note that the apparatchiks in the government don't care "personally" because it's not really their money so it's easy for them not to react in this proper way – it's leading the country it governs into hell.

At any rate, rising interest rates can't possibly be an excuse to increase the size of the government. Quite on the contrary, they're a warning, a pressure that must convince every rational government to reduce the expenses.

Increasingly expensive services provided for free

The third reason that Summers cites as "evidence" that the government has to be getting bigger as a fraction of the GDP is that the services that the government pays for its numerous citizens are getting increasingly more expensive. Again, Summers is describing another symptom – accumulating body fat in another part of the body – but he doesn't even dare to admit that the underlying problem could be or should be wrestled with.

The government is promising the citizens an increasing number of things for free (and an increasing fraction of them isn't really needed or wanted by many recipients) even though it can't really afford it. It's wrong and the government must stop doing these things or at least stop increase the number of these things. It's simple.

But we may also analyze the situation from the opposite side. We may ask: Why is the price of services such as education and healthcare growing more quickly than the price of products which is actually decreasing in most cases? It's simple. People employed in education and healthcare are seeing an increasing demand – because the government keeps on growing and is prescribing an ever greater amount of (often useless or counterproductive) education, healthcare, and other things. And if the demand is growing, of course that the people doing these things may expect an ever greater compensation.

What Summers' point 3 actually shows is another proof that the government has been growing; as well as a proof that the government works less efficiently than the private sector because it doesn't "spontaneously" lead to the decrease of prices of the products and services. Of course that it doesn't because it lacks the competition and other key mechanisms that make the capitalist societies work – and that make them work ever more efficiently.

So instead of considering the growing price of education and healthcare services to be a parameter that helps us to decide whether the government should grow, we should really view these observations as symptoms of the fact that the government has grown and continues to grow in an unhealthy direction. So these are just additional reasons to actively shrink the government. When one actively shrinks the government, i.e. reduces the amount of mandatory education and brainwashing and inspections that everyone has to undergo, the effect on the public budget will be kind of doubled. Not only some of the expenses disappear because they were simply scratched from the list of expenses; but even the remaining ones that weren't scratched will become cheaper, so this will serve as another source of savings. Another, third improvement will boil down to the fact that more work will be performed in a more efficient (private) sector that, as Summers admitted, is more capable of increasing the efficiency and lowering the prices.

At any rate, the number of expenses and projects and mandatory standards, regulations, inspections, verifications, interventions etc. has to be actively reduced. If it is not being reduced, the government will continue to grow, including some positive feedbacks, but what Summers actually shows are just the feedbacks that may work in both directions – either to inflate the government or make it more efficient. The actual sign of the future trend isn't determined and the only way how Summers got a "plus sign" (the government will grow) is that he assumed it. He assumed it that the future politicians will be as blind devotees to the big-government paradigm as himself.

Infrastructure

It's obvious that it's often better to make an investment and use e.g. good highways for many years than to suffer for years. However, not all investments are good investments. What's sick about the government as a concept is that it never carefully evaluates whether some investments were good ones – or at least it never stops the "same kind of investment" that has been shown to be a waste of money.

So there are highways that are built (or huge scientific experiments, or whatever) and they're simply too expensive relatively to what they bring to the society. They shouldn't be paid for by a rational government because they wouldn't be paid by a rational rich individual, either. Such things have to be traced. The government must be able to critically look at its own spending. Of course, the most natural way for a country to create this "feedback" is to leave a maximum amount of these things to the private sector, to privatize; the public sector is just intrinsically bad at all these things and self-appraisals. An investor may build a road and think about a way to fund it by the users of the road. If the project isn't profitable, it probably won't be realized, and that's how it should be.

To summarize, Summers' text is completely invalid as "evidence" or "justification" of an ever growing government because the desired conclusion has been assumed from scratch. It was assumed because Summers promoted all the good steps that must be done – increases of the retirement age, reductions of pensions, reductions of many kinds of entitlements, regulations, interventions, inspections, reeducations, brainwashing, etc. etc. etc. – to taboos that can't even be considered.

It's probably true that Barack Obama and people around him are worshiping the same dogma of an ever greater government and that the judgement day – the butchery by China et al. Ltd. – is inevitable within a few decades with similar Obamas standing in front of the steering wheel. But it may be a good idea to wait and see whether Mitt Romney is really another copy of Obama in this respect. Especially after he chose Paul Ryan as the running mate, responsible Americans have a new reason for some optimism.

And that's the memo.

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snail feedback (23) :


reader Ann said...

In 'The Myth of the Robber Barons' the author Burton Folsom illustrates the difference between the crony capitalists who built the US railroads with federal subsidies versus James Hill who build his railroad without subsidies (private enterprise); cronies built shoddy track and overly long routes bcz gov subsidized them by the mile; Hill built solid track and took time to make shorter routes (cheaper/better for customers) and built up support centers as railroad was constructed. Other big US industries are analyzed in this monograph as well (steam ships, oil, steel, coal) and Fulsom shows the many ways the federal government made things far more costly and inefficient than the private enterprise. Folsom is careful to point out big differences between the 'political entrepreneurs' (seek and get gov handouts/protection) versus 'free market capitalists' (raise private capital). The history of Sherman Act and Interstate Commerce Commission not so perfect, both did harm to economic growth and had negative consequences in some cases. The book is worth reading -- it's well researched and thoughtfully written.


reader Gene said...

A free market can have negative consequences and correcting these damages occasionally requires governmental intervention. In the long political battle over building the Golden Gate Bridge the private railroads, which profited from the Bay's ferry services, spent large sums in trying to keep bond issues off the local ballots. If they had won we would have had a huge and costly mess to deal with today. It can also be argued that our Interstate Highway System (thank Eisenhower, a Republican President) has been an immense contributor to the efficiency of American commerce.


Of course I agree with Lubos and disagree with Summers but knee-jerk reactions against everything governmental sometimes deserve a second look.


reader Luboš Motl said...

A free market can have negative consequences and correcting these damages occasionally requires governmental intervention.


Perhaps, but it's still good luck, and not something one may rely upon, if a particular random government intervention happens to be beneficial.


reader Gordon Wilson said...

It is interesting how societies evolve. They seem to follow a sinusoidal curve that goes from free market capitalism to big government Marxism. The U.S. seems to be gradually being converted into what it fought against in the "Cold War". More and more people "work" for the government, get government pensions, and get
government benefits and entitlements---does this remind one of the former Russia somewhat? Eventually nearly everyone works for the government, the bureaucracy grows unchecked, and productivity plummets...sort of follows a logistic equation. Too cynical? Perhaps.


reader Josualdo said...

“The bureaucracy is expanding to meet the needs of the expanding bureaucracy.” Oscar Wilde, quoted in that immortal game, Civilization IV.


reader Finn Larsen said...

Larry Summer's arguments are indeed colored by ideology, but so are your counterpoints.


1. I think you are right in the criticism, retirement could and should go up.


2. I think he is right that it is prudent to expect interest rates not to stay at record lows. This is a pragmatic judgement. You are right in the charge that he is inconsistent in the application of his argument.


3. I think you are incorrect. Services becomes relatively cheaper because they require more manpower relative to manufacturing. You argument has some merit but by ignoring the standard argument you loose some credibility.


4. I think he is right that the US government is underinvesting and has been for quite a while. Sure, you are right that projects must be planned with cost-benefit in mind. But I think the cost-benefit analysis shows more infrastructure is called for, and that increased government financing of such infrastructure is justified. Your point is entirely ideological. His may be as well, but cost-benefit favors him, I think.


Your analysis of the politics is also strange. The Romney-Ryan camp are making many comments indicating they want to cut government but the only specific plan is to cut taxes. There are no specifics about what government programs they want to cut. Summers judge that this is because they will in fact not cut the size of government. Indeed, previous Republican administrations made similar anti-government arguments but ended up with no cutting. Maybe Romney-Ryan are different but there is very little evidence either way. In fact, if indeed they end up elected and then making major cuts it is problematic for the democratic process because they are not running on a platform that includes actual cuts.


reader Luboš Motl said...

Hello, thanks for your feedback.


1. Great.


2. I've been not just expecting but calling for higher interest rates for many years - it has become a distortion that was behind many bubbles and their bursts in recent years.


3. It's undoubtedly true that services require more human labor than manufacturing, it can't be automatized that well. But it isn't quite true that the public sector are services and the private sector is manufacturing. There's a lot of public manufacturing, like the infrastructure from the point 4 where labor actually isn't dominant, and lots of private services, so trying to push a "trick" that pretends that "services means public" and "manufacturing means private" is demagogy.


Moreover, one should be more careful when answering the question why the human labor isn't getting cheaper as quickly as products etc. This fact itself is a consequence of the government intervention, too. In the private sector, if you say that products are getting cheaper because of automatization, this has a simple interpretation: human workers have competitors - robots (and those who produce them) - so the price of their labor must also go down! So if the markets were undistorted, this situation in which "labor remains expensive while products get cheaper" wouldn't occur. The human labor remains expensive or is getting more expensive *purely* because the government competes with the private employers and thus artificially increases the price of human labor. At any rate, all these observations that are used as excuses to tolerate a growing government are actually *consequences* of a growing government.


4. I don't believe the U.S. government is underinvesting. I don't understand in what sense my point may be ideological while you're trying to pretend that your opposite point isn't ideological. When you're saying exactly the opposite, it must be as ideological as my assertion, mustn't it? Do I understand well that everything that is conservative is "ideological" while everything that is left-wing is "impartial and apolitical"? Thanks but I won't tolerate such suggestions on this blog - my nation has tolerated them for 42 years in my country instead of having neutralized the communists in 1948 and the results weren't pretty.


Your last paragraph is answered by something you should have heard of before, namely Starve the beast.
http://en.wikipedia.org/wiki/Starve_the_beast



There is nothing wrong about this strategy and it has worked in the past.


reader SteveBrooklineMA said...

You're right about demand, Lubos. Summers mentions the exploding cost of healthcare and education, but doesn't seem to see any connection between these costs and the government's funding of purchases of these services. Gov funds purchases, demand rises, prices increase, thus more Gov subsidies are needed. What is the feedback parameter?


reader Luke Lea said...

Dear Lubos, With trepidation I'm going to respond to Summers' argument before I read your response: I find it hard to disagree with him. Personally I would like to see more transfers (which is not the same as government spending) from capital to labor, specifically, wage subsidies financed by progressive taxation. The challenge, as I see it, is how to accomplish such transfers while preserving proportionality between effort and reward and without destroying the incentives to save and invest. A graduated consumption tax (or, more accurately, a graduated expenditure tax) which treats all income the same and allows no exemptions except for savings, is the way to go. This approach would not hinder the concentration and aggregation of capital for investment nor would it decrease entrepreneurial incentives to get rich, as you might think (you said as much last time I raised this idea). On the contrary.

Now I will brace myself. best,


reader Luke Lea said...

Dear Lubos, Having now read your response to Larry Summers let me say I agree with everything you say too! (Well, everything except the interest rates, which I think were spectacularly low because of China's, i.e., the Chinese Communist Party's, intervention in their own markets, which resulted in over-saving for them and huge US trade deficits for us.)

How can I agree with both sides? Here is a hint:

http://facingzionwards.blogspot.com/

You are always stimulating. thanks,


reader dalpezzo said...

Dear Lubos, just a minor remark on 1. There are several factors that contribute to the increasing percentage of people above 65. One is increased life expectancy, but others are a) Baby-boomers retiring b) Birth-rate declinining.


reader Gene said...

Yes; I was cherry picking. Eisenhower was special and we do need more like him today. I still call myself an Eisenhower Republican even though it seems to be an endangered species, especially here in California. Hell, the entire Republican Party is endangered in California.


Incidentally, the retirement age is going up, at least in the US Social Security System. It should increase somewhat faster but the issue is not being ignored entirely.


Of course the private sector has much better correction mechanisms than the public sector but, as an ex Xerox employee and long time observer of General Motors, I have found that they can be very, very slow.


reader Werdna said...

"A third of the federal budget pays for people above 65 years whose fraction will go up"

Larry Summers may well be correct that this will increase, but it is kind of amusing that because this is what probably will happen, we are expected to make the leap that this is what should happen. In a sane world, we would not allow this to happen. Summers is in effect reveling in the insanity of the world.

"Interest rates and the interests from the debt will go up"

Interesting that he would say this. It is probably true that this should happen. I don't believe I've seen a Keynesian call for "contractionary" interest rate changes before. I suppose what he means is that they must-he is making supplications to reality-but wants to be a perpetual procrastinator about it-let's raise them tomorrow, and after two, tomorrow is still a day away...But I really fail to see the logic why this means that spending will also go up. Logically this should force a reduction in government borrowing, at least, again, in a sane world. The inverted argument he made before-borrow and spend now while it's cheap-made more sense but was still not correct.

"Suspension of investments into infrastructure isn't sustainable in the long run"

Here, Summers confuses "government investment" with "investment" but regardless, let's suppose-incorrectly-that only the government could create the infrastructure that is "needed"-does not scaling back "investment" in such by the government require the government take up a greater fraction of the economy? Absolutely not. It is only necessary if one accepts Summer's insistence that no one touch anything else the government spends money on. It's like this:

"We need to make cuts"
"Okay, I agree"
"So how about starting with [x]"
"What are you some kind of nutcase? [x] is necessary! No touchy!"
"Well fine, how about [u]?"
"What are you crazy? [y] is a sacred service! No touchy!"
...

And so on until the person who has agreed we need to make cuts has eliminated all possibilities for cuts. Then they demand you let them bleed the rich so they can not only not cut anything but they can expand everything, including the deficit. In short they really don't agree.


reader wef said...

Larry Summers is very conflicted. He is basically a Hayekian, but he is also a power-worshiping lewinsky.


He is a little unsober here but revealing.


http://www.youtube.com/watch?v=Vgg5DoPkgYc&feature=player_embedded#!


reader Luboš Motl said...

Dear Dalpezzo, fine facts but both of them have a slightly more symmetric impact on the actual question how many people are out of the productive age - for a simple reason: children are *also* outside the productive age and need various kinds of assistance from the government, from education to maternal leave.


So both of these points are actually flawed as arguments that the government should grow, relatively speaking, because they have pretty much the same if not longer contributions showing that they should decrease. At any rate, a more inclusive calculation of the dependence on the age curve is needed - Larry's and yours that completely neglect the young-people-related expenses is clearly not valid.


reader funplay said...

medicare is also a problem since it's price increases and will still keep increasing and universities play their role in this because they do not produce enough doctors to keep their salaries high.
the same happens here but it is changing because there are 10 times more people graduating from eastern europe from the Czech Republic, Hungary and Slovakia.
although they get their first degree it is very difficult to get a specialty in certain area of medicine because the doctors on purpose do not admit enough people for a specialty. when there are less there is less competition and they can have more customers.
it is not like people that scored 1/10 or 0.5 a point less in the university entrance examinations would not be able to become doctors or good doctors.


reader Dalpezzo said...

Good points Lubos, thanks.
Actually, I didn't even think of claiming that government should grow (I believe quite the opposite).
Disagreeing with your argument is not the same as disagreeing with the final conclusion.

I just wanted to point out that there are several factors involved and that they should be carefully compared, as it is not obvious which one gives the biggest contribution.

Life expectancy increases fairly slowly.
Well, actually it's been increasing by about 2 months per year since the late sixties, but we don't know how stable is the trend, etc. While retiring baby-boomers will be/are a big group of people leaving the work force within an interval of about 10 years or so.

It was dumb to miss immigration, but it was not intentional. I thought missing 2 important factors is enough to indicate that the argument is incomplete
and doesn't get full score :P
No offence intended.


reader cynholt said...

Because corporatist politicians have been running the show in
Washington, starting under Reagan and accelerating under Clinton and
then under Bush and Obama, there's been an active push to privatize all
things public under the sun -- anything from schools, prisons and law
enforcement to roads, bridges and parking meters. So the growth hasn't
been in the public sector, Lubos, it's been in the PRIVATIZATION of the
public sector.



Taking public assets in the form of either goods and services and
handing them over the private sector is commonly referred to in
progressive circles as kleptocratic rent-seeking. It not only benefits
the very few at the expense of the very many, but it also adds a lot
more costs than benefits to the overall economy.



The great American economist Michael Hudson, who predicted the 2008
credit crunch to the T, writes frequently on this kleptocratic practice
of looting public assets for the sole benefit of the few in the private
sector. He terms the outcome of this as a "tollbooth economy." It should
be as clear as day that no private enterprise can ever provide public
goods or services as cheaply and as effectively as a governmental
agency. The benefits for well-connected government insiders (like Larry
Summers and Bob Rubin -- to name a few) are obvious, but why anyone else
would buy this bill of goods is astonishing and depressing. At current
course and speed, the US should achieve a neo-feudal economy in very
short order. It seems the Russian kleptocrats had as much influence on
our beloved Chicago School (neoliberal) economists as those rent-seeking
hyenas had on the Russian people.


reader Gene said...

A free market can have negative consequences and correcting these damages occasionally requires governmental intervention. In the long political battle over building the Golden Gate Bridge the private railroads, which profited from the Bay's ferry services, spent large sums in trying to keep bond issues off the local ballots. If they had won we would have had a huge and costly mess to deal with today. It can also be argued that our Interstate Highway System (thank Eisenhower, a Republican President) has been an immense contributor to the efficiency of American commerce.


Of course I agree with Lubos and disagree with Summers but knee-jerk reactions against everything governmental sometimes deserve a second look.


reader Luboš Motl said...

A free market can have negative consequences and correcting these damages occasionally requires governmental intervention.


Perhaps, but it's still good luck, and not something one may rely upon, if a particular random government intervention happens to be beneficial. Of course that people who happen to be in the government, like Eisenhower, may do good things. After all, they're not too different from some folks in the private sector. The main difference between the sectors is that the commercial one actually has natural mechanisms that increase the likelihood - and help it to increase over time - that the investments will be beneficial and close enough to optimal. This difference may only be seen statistically but if one allows the two paradigms to compete, the difference does show up roughly as the difference between Western Europe and Eastern Europe (or West and East Germany) 20 years ago. Of course that I imagine that your positive appraisal of the Eisenhower project is justified; however, such things - trees - may be cherry-picked and one may overlook the forest which still says that the money spent in the public sector lead to less wealth and less happiness per dollar.


reader Josualdo said...

“The bureaucracy is expanding to meet the needs of the expanding bureaucracy.” Oscar Wilde, quoted in that immortal game, Civilization IV.


reader Finn Larsen said...

Larry Summer's arguments are indeed colored by ideology, but so are your counterpoints.


1. I think you are right in the criticism, retirement could and should go up.


2. I think he is right that it is prudent to expect interest rates not to stay at record lows. This is a pragmatic judgement. You are right in the charge that he is inconsistent in the application of his argument.


3. I think you are incorrect. Services becomes relatively cheaper because they require more manpower relative to manufacturing. You argument has some merit but by ignoring the standard argument you loose some credibility.


4. I think he is right that the US government is underinvesting and has been for quite a while. Sure, you are right that projects must be planned with cost-benefit in mind. But I think the cost-benefit analysis shows more infrastructure is called for, and that increased government financing of such infrastructure is justified. Your point is entirely ideological. His may be as well, but cost-benefit favors him, I think.


Your analysis of the politics is also strange. The Romney-Ryan camp are making many comments indicating they want to cut government but the only specific plan is to cut taxes. There are no specifics about what government programs they want to cut. Summers judge that this is because they will in fact not cut the size of government. Indeed, previous Republican administrations made similar anti-government arguments but ended up with no cutting. Maybe Romney-Ryan are different but there is very little evidence either way. In fact, if indeed they end up elected and then making major cuts it is problematic for the democratic process because they are not running on a platform that includes actual cuts.


reader Ann said...

In 'The Myth of the Robber Barons' the author Burton Folsom illustrates the difference between the crony capitalists who built the US railroads with federal subsidies versus James Hill who build his railroad without subsidies (private enterprise); cronies built shoddy track and overly long routes bcz gov subsidized them by the mile; Hill built solid track and took time to make shorter routes (cheaper/better for customers) and built up support centers as railroad was constructed. Other big US industries are analyzed in this monograph as well (steam ships, oil, steel, coal) and Fulsom shows the many ways the federal government made things far more costly and inefficient than the private enterprise. Folsom is careful to point out big differences between the 'political entrepreneurs' (seek and get gov handouts/protection) versus 'free market capitalists' (raise private capital). The history of Sherman Act and Interstate Commerce Commission not so perfect, both did harm to economic growth and had negative consequences in some cases. The book is worth reading -- it's well researched and thoughtfully written.