Does “Wagner’s Law” Mean Libertarians Should Acquiesce to Big Government?

There’s a lot of speculation in Washington about what a Trump Administration will do on government spending. Based on his rhetoric it’s hard to know whether he’ll be a big-spending populist or a budget-cutting businessman.

But what if that fight is pointless?

Back in October, Will Wilkinson of the Niskanen Center wrote a very interesting—albeit depressing—article about the potential futility of trying to reduce the size of government. He starts with the observation that government tends to get bigger as nations get richer.

“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. …Wagner’s Law names a real, observed, robust empirical pattern. …It’s mainly the positive relationship between rising demand for welfare services/transfers and rising GDP per capita that drives Wagner’s Law.

I’ve also written about Wagner’s Law, mostly to debunk the silly leftist interpretation that bigger government causes more wealth (in other words, they get the causality backwards), but also to point out that other policies matter and that some big-government nations have wisely mitigated the harmful economic impact of excessive spending and taxation by having very pro-market policies in areas such as trade and regulation.

In any event, Will includes a chart showing that there certainly has been a lot more redistribution spending in the United States over the past 70 years, so it certainly is true that the political process has produced results consistent with Wagner’s Law. As America has become richer, voters and politicians have figured out how to redistribute ever-larger amounts of money.

By the way, this data is completely consistent with my recent column that pointed out how defense spending plays only a minor role in America’s fiscal challenge.

Defending Privilege in a World of Disruptive Innovation

Two front-page stories in the Metro section of Monday’s Washington Post depict protected service providers desperately trying to fight off innovations that might serve customers better and threaten the comfortable incomes of the established providers.

First up, Tesla and the automobile dealers:

Don Hall, president of the Virginia Automobile Dealers Association, was making the hard sell.

Staring directly into the camera, using the language of war, he urged car dealers to unite against a force that he said threatened their livelihoods: electric-car-maker Tesla….

The reason that Hall was sounding the alarm: Tesla, which sells its cars directly to consumers rather than through franchise dealers, is trying to open a second store in Virginia.

Car dealers in Virginia and across the country have been fighting Tesla, seeing the company’s direct-to-consumer sales model as a threat to the franchise system that they say protects consumers as well as their own business interests.

In Virginia, as in most states, it is generally illegal for manufacturers to sell cars directly to consumers.
Like all regulatory rent-seekers, the automobile dealers have some public interest rationales, such as the claim that customers benefit by being able to shop for service among multiple dealers of the same automobile. But their arguments may rest more firmly on the fact that “over the past decade, VADA has given Virginia politicians $4 million in campaign contributions.”
 
Private companies aren’t the only protected providers. Just below the Tesla story was one about advocates of the federally funded school voucher program in the District of Columbia hoping that a new president will be more supportive of school choice than President Obama has been. Defenders of the traditional school monopoly are not giving up:

The prospect of an expanded voucher program is not a welcome one among the District’s elected officials, who chafe as Congress — where the District has no vote — passes laws that shape the landscape of city education. Many also are ideologically opposed and worry that an expanded voucher program could threaten the progress and growth of the city’s traditional public and public charter schools.

“I’m 100 percent opposed to public dollars going to private schools like this,” said D.C. Council Member David Grosso (I-At Large), who has spoken forcefully against the voucher program for years.

In a world where millions of students, especially low-income and urban kids, are getting a poor education, teachers unions and school bureaucracies have been fighting choice programs for more than two decades. Just like automobile dealers, they put their own interests ahead of those of their customers.

I should note that Clayton Christensen, who coined the term “disruptive innovation,” would probably say that these examples don’t qualify. Maybe I should just use the older term “creative destruction.” By any name, it’s people trying to protect their own lucrative position against competitors who think they can serve consumer needs better.

Dispelling the Myth of the Ravenous Fisherwoman

The U.S. Court of Appeals for the D.C. Circuit is considering whether the Environmental Protection Agency acted unreasonably when it issued regulations of hazardous air pollutants from coal and oil power plants under Section 112 of the Clean Air Act, regulations that provide far less than a penny in benefits for each of the nearly $10 billion in costs it imposes on the U.S. economy.

If this question sounds familiar, it’s because EPA tried this gambit before—and lost. In Michigan v. EPA (2015)—in which Cato also filed a brief—the Supreme Court rebuffed the agency for its failure to consider the costs of very the same regulations. On remand, EPA doubled down by issuing a supplemental finding that did no more than pay lip service to the Court’s admonition that rules whose benefits are greatly outweighed by their costs are irrational.

In light of the agency’s grudging concession that it could quantify only $4 to $6 million in statutorily-defined benefits to “women of child-bearing age in subsistence fishing populations who consume freshwater fish that they or their family caught” in enormous quantities, EPA attempted to justify its $10 billon rule by pointing to other non-statutory benefits, which it euphemistically calls “co-benefits.”

As we argue in our new brief, the D.C. Circuit should reject EPA’s end run around the Supreme Court’s decision and statutory limits on its regulatory authority. EPA’s failure to identify anything more than de minimis benefits for an action that will impose billions of dollars of costs is the height of arbitrariness. If EPA cannot justify the regulations forthrightly, it should withdraw them—not re-write the statute to target industries that it disfavors. 

A Wall Is an Impractical, Expensive, and Ineffective Border Plan

Donald Trump is not backing away from his plan to build a wall along the U.S.-Mexico border. Here’s what you need to know about the proposal.

Public Support for a Fence or Wall

In 2013, 57 percent of likely voters told Rasmussen that they think that “the United States should continue building a border fence along the Mexican border.” In 2015, that number fell to 51 percent when asked about a “wall along the Mexican border.” CBS News asked the same question of registered voters in 2016 and found only 39 percent agreed with “a wall along the Mexican border.” Unfortunately, those surveys failed to specify the length of the fence or wall. Only 36 percent of registered voters told Pew in 2016 that they wanted to see a wall “along the entire border with Mexico.” In November, 54 percent of voters in the national exit poll also opposed to that proposal. In May, Arizona’s Cronkite News, Univision, and Dallas Morning News found that 72 percent of U.S. residents living in border cities opposed a wall.

The Wall Trump Has Proposed

When Trump announced he was launching his campaign for president in June 2015, he said that he would build a “great, great wall on our southern border.” The U.S-Mexico border is almost 2,000 miles, but he later clarified that the wall would only cover 1,000 miles due to “natural barriers.” As for the height, he has given estimates from as low as 30 feet to as high as 50 feet. His most common estimate appears to be 35 feet, and he said as recently as August that the wall would be between 35 and 45 feet high. Below is a Washington Post visualization of the size of a 35-foot wall.

Image 1: Size of Proposed Trump Wall

Source: Washington Post

The Myth of Border Insecurity

Many Americans feel that the United States government is not in control of the border and that the lack of control is a deliberate government policy. Nothing could be further from the truth. The government has greatly expanded the scale and scope of immigration enforcement on the southern border in recent decades. 

The government built fencing on the southwest border and increased the mileage from zero in 1990 to 653 today (Figure 1). Some of that fencing is porous and much of it is made to deter vehicles, but it is located in some of the previously most heavily trafficked areas. The effect was that unlawful immigrants were forced to cross in new, more dangerous areas. President-elect Donald Trump said he wants a 1,000-mile wall at the border, which means he’s already most of the way there.

Figure 1

Border Fencing

 

Source: Congressional Research Service.

Fumbling Federal Finances

The federal government has suffered from waste, fraud, and abuse in its spending programs for decades—actually, centuries. A federal effort in the 1790s to run Indian trading posts, for example, was plagued by inefficiency. For almost as long, studies have been documenting the waste. An 1836 Ways and Means Committee report, for example, criticized river and harbor projects for being chronically overbudget.

The wasteful spending continues today, and the latest effort to document it is Senator James Lankford’s new study, “Federal Fumbles: 100 Ways the Government Dropped the Ball.” The study describes projects such as “$495,000 to fund a temporary exhibit for sights, sounds, tastes and yes, even smells of the Medieval period” and $2 million for a “multi-year study about kids’ eating emotions, and how they don’t like to eat food that’s been sneezed on.”

Spending on such dubious projects represents only a small share of the $4 trillion federal budget. However, Lankford’s examples illustrate the broader overspending disease that afflicts Congress and the executive branch, which I discuss here and here. Lankford’s projects are not just random failures: they stem from structural features of the government that induce politicians and agency officials to spend on low-value activities.

Senator Lankford will discuss his report at a Cato forum on Capital Hill, Wednesday at noon. Tom Schatz, Justin Bogie, and I will comment on the report and examine prospects for cutting spending during the Trump administration. All are invited.

To explore the structural reasons for ongoing waste in federal spending, see “Why the Federal Government Fails” and essays here.

Understanding When China Can (and Can’t) Wield Economic Influence

China Flag SmokestacksAs China grows more economically powerful there is growing concern about how it will convert its economic power into strategic influence. In its 2016 annual report, the U.S.-China Economic and Security Review Commission recommends closer scrutiny of Chinese economic practices and advocates creating a panel to prevent China’s state-owned enterprises from gaining “effective control” over U.S. companies. Fear of China’s commercial influence has recently spread to Hollywood as well, with recent purchases of film studios and theater chains by China’s Dalian Wanda leading to a torrent of commentary warning against Beijing’s nefarious long-term intentions.

The idea that China can easily convert its economic clout into influence is attractive and intuitive given the government’s important role in the economy. In Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control, William J. Norris, a professor at Texas A&M University’s Bush School of Government and Public Service, casts a skeptical eye on this assumption. Norris came to the Cato Institute recently to discuss his theory of economic statecraft and shed light on the complex domestic factors that help or hinder China from using commercial actors to achieve strategic goals. (Full disclosure, as a student at Texas A&M I spent several months as Norris’s research assistant while he worked on the book.) Using a theoretical model rooted in principal-agent theory applied to several case studies, Norris is able to show that China’s political leadership and commercial actors are not always on the same page.  

Economic statecraft is the intentional manipulation of economic interaction to produce or affect some sort of strategic end. Norris finds that effective economic statecraft requires state control over commercial actors and state unity across different sectors of government. While the Chinese government may have nominal control over its state-owned enterprises, it can be very difficult to get local officials in sync with provincial or national-level officials, which impedes the effective execution of economic statecraft. In some of Norris’s case studies Chinese commercial actors made decisions with little direction or oversight from state officials that had unintended strategic effects down the road.

The most important take-away from Norris’s book is, “economic statecraft is not an easy lever of national power for [China] to wield. To be effective, many factors need to align.” China’s economy makes it easier for the government to use its companies in strategic ways, but even in the Chinese system there are numerous factors that make it difficult to use commercial actors to achieve strategic goals. While Beijing has used commercial actors to achieve strategic goals, not every move by a Chinese state-owned enterprise is a strategic master stroke designed to maximize China’s power or undermine the United States. In order to better identify the real cases of Chinese economic statecraft, it would be prudent for analysts to apply the model in Norris’s book.