Thursday, December 15, 2011


In this graph that I made on the St. Louis Fed website, we have government employees divided by population in blue, with the scale on the left, and government spending divided by GDP in red, on the right. Any thoughts?

A lot of the narrative we are still fighting out today about government first got written in mid-century, when the role of government in society was changing rapidly (something that's quite clear from the figure). My view is that free people in a free society did what free people do: they evaluated how they wanted to live their lives and acted on it, and the market and democratic forces that allow for self-regulating orders to emerge from the interaction of free agents generated a new order, which has been fairly stable since around the early 1980s. In the 1980s the whole processes slowed down, universally recognized excesses resulting from the growing pains of mid-century were cleaned up as the years went on, and the system stabilized.

That's what I see here, and I think people who act like we're on some trajectory dating from mid-century are muddying the analysis. I think they would be less confused if they realized that emergent orders aren't always libertarian orders.

The red line is a little trickier, of course, because neither the numerator nor the denominator are as stable as the blue line. In addition, the numerator and denominator of the red line have a short term negative relation, while the numerator and the denominator really only have a long term positive relation. Most of the gyration in that red line after 1980 is attributable to the business cycle and fiscal policy. Once you recognize that, I think the red line tells the same story as the blue line of transition to a new order.

Going forward, we may see another transition related to health care. We may make the transition to socialized health care that Europe made earlier, and that will cause another blip up to a new equilibrium. I'm personally one that hopes that doesn't happen - I hope we can invest in health research and provide a safety net without socialization. But we'll see what happens.

Barely anyone alive today really lived in the old equilibrium. Many people alive today lived during the transition to the new equilibrium, and the new equilibrium itself. I haven't even lived in the transition - I've only lived in the new equilibrium. I rather like it, I don't think it's unreasonable, and I feel a little put off by people who tell me I don't like freedom because I won't relent and demand the sort of world they want to live in. I recognize I'm demanding the same thing of them, and I accept that I am, but they never quite seem to recognize that's what they're demanding of me.

Any thoughts?


  1. I'd also be worried if the transitions to a new order with each shift to a new equilibrium would include war. War is often excluded from economics as an exogenous event. And with the world economy still in dire straits, there's a chance a major conflict can happen despite the efforts to maintain something of a peace.

    But why would you be opposed to socialized healthecare, Daniel?

  2. Markets provide goods more efficiently.

    I have no problem at all with a substantial presence of government in health care - I want to be clear about that. I want them to correct clear externalities. I want them to provide a safety net. I'd even support them socializing the risk in the costs through a public option - ideally a public catastrophic health insurance program. I'd even probably accept a socialized catastrophic public health program. When I say "socialized" I should be more clear and say "single payer". Don't get me wrong - I don't think single payer would be doomsday or anything. And some day we may get single payer not because it's good but because it's better than the alternatives on the table. But I don't see why it's a good idea.

  3. Is there a good reason to go for single payer rather than smart intervention?

  4. I think it's very interesting to ask... How long does it take culture to change for it to come into equilibrium with the new state of society?

    I have some right wing ideas about this that you would not like :)

  5. A think the red line during the Reagan years suggests borrowing was not included. I think the spike at 2009 looks like Obama putting Bush's spending on-budget as well.

    Invisible Backhand

  6. IB -
    This was just grabbing things from FRED that looked like a reasonable way to talk about this. I'm sure it could be cleaned up. I think it should be all government - not just feds. It's expenditures so it should include all the borrowing. The other thing I wasn't sure about was how contractors are treated (or what share of total government employment this even is) but that's one of the reasons why including spending is nice - contractors and employees both would come under spending. But people should feel free to find better variables or double check. I just wanted to track down some information that I was inspired to track down because of a conversation with Rod Long at Coordination Problem.

    It may reflect Obama putting Bush on budget - I don't know the details of that. We also had a lot of stimulus and a big drop in the denominator. I am less inclined to make Reagan/Bush v. Obama point here. The whole trend seems to have leveled off despite its volatility. This is especially true when you look at it with the business cycle in mind. That's the main point I think.

  7. Daniel Kuehn: I wasn't suggesting that you should go for the single-payer option, I merely was inquiring about your personal opinion.

  8. Current -
    I'd be happy to hear some right wing thoughts! I'm personally not really as left wing as my blogging amidst a depression in conversation with libertarians might imply. Left wing ideas don't often disturb me like they disturb some people, but then again right wing ideas don't really disturb me like they disturb some people too.

  9. I think many of the problems of high state spending are only just becoming strong because society is only just adjusting to them.

    In the past people like me have complained that high taxation and welfare will discourage work and achievement. I think for a lot of the past fifty years that has only been true on small margins. High taxes may cause adults who are working may decide to work fewer hours and take more holidays, retire early or not try for promotion. But, it doesn't affect their overall lifestyle or who they are to any great extent. Things are different over the longer term when many generations are involved. Shifts occur in behaviour and culture.

    Unemployment welfare, for example, isn't particularly troublesome if you don't have an underclass to start with. But, once you do it is because it provides a ready-made community. Over time the stigma attached to things like claiming welfare has diminished. Where I live in Ireland there is very little stigma to welfare fraud now too.

    In Britain it's commonly assumed that the fall in educational standards is simply a result of the failing performance of the education system. What's often forgotten is that every teenager is quite aware that their future will probably give them the opportunity of living off the state, even if not immediately then quite soon after they finish their education. In the past young people who disliked work, had little ambition and had few material desires knew they would have to do some sort of job, that isn't true any longer. For the same reasons being a member of a gang of some sort becomes more attractive.

    I'm 33 myself and many of my friends are younger. Lots of them don't have jobs and many didn't have jobs before the crisis in 2008, often by choice. Those that do often only have part-time jobs. Most don't have any ambition to change, to join the ranks of professions or work full-time jobs. Many have done degrees but more for the pleasure of learning than to find a job (I live in Ireland remember, University was free until recently).

    All of this would not be a major issue if only welfare recipients were relevant. What makes it more important is that the opinions and norms of this group have spread much more widely. In my experience many people with low-paid jobs now hold similar opinions. As welfare has expanded the underclass so their values have seeped into more of our collective culture. One of the best examples of this is Hip-Hop music which often glorifies the lifestyle of American gangsters. David Starkey commented recently on this, but he missed the point. It doesn't matter where a sub-culture originates or whether it originates with some ethnic group, what matters is the impact is has.

    Then there's the changes caused by welfare for single mothers. To a lot of women it's no longer a great financial concern if the father of their child leaves, especially if he's a low earner. That reflects on many men and means they no longer have the incentive to try hard to be providers.

    What's happening where I live as far as I can see is that a sort of class gulf is opening up between those for whom having a conventional lifestyle (job, marriage, kids etc) still has advantages and those for whom it doesn't.


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