In an earlier post criticizing Paul Krugman’s “Twinkie Manifesto,” I tried to make a simple point: just because economic policies produced good results at an earlier stage of economic development doesn’t mean they’ll work well today.
Let’s back up and review. Here was Krugman’s argument: (a) back in the ’50s the top tax rate was 91 percent, union density was high, and the economy boomed while incomes converged; (b) therefore, a return to dirigisme would be good for both growth and widely shared prosperity. I responded that correlation ain’t causation: the early post-WWII decades were an economic Golden Age, but that’s because the conditions for growth were so favorable that the country prospered despite the bad policies Krugman now longs for.
In identifying some of those favorable conditions, I mentioned, among other things, (a) the opportunities for catch-up growth in the South and West, facilitated by big advances in transportation (e.g., the U.S. highway system built during the ’20s and ‘30) and (b) the rapid accumulation of human capital as reflected in soaring high school and college graduation rates.
Yes, both of these factors involved public investment at either the local, state, or federal level, which led Brad and Matt to pounce. See, they argue, Big Government was good for growth!
First of all, I’m a Hayekian classical liberal, which means I’m fine with a government role in funding roads and schools. So Brad and Matt’s attempt to play “gotcha!” misses the target.
But back to the main point: what are the contemporary policy implications of the fact that some public investments in the first half of the 20th century – when government spending levels were much lower, and the economy was much poorer and less advanced – aided growth? As economists Vito Tanzi and Ludger Schuknecht show, returns to government spending in terms of social welfare declined rapidly in the second half of the 20th century. And now we’re in the second decade of the 21st. Hey Big Government, what have you done for me lately?
Let’s look specifically at education and infrastructure. Both sectors are dominated by government, and both are hot messes of waste and mismanagement. The way forward in both sectors will involve greater reliance on competition and private sector involvement, not less.
So sorry, Brad and Matt, I know it’s Thanksgiving and all, but you can’t go home again either.