Freedom and Prosperity: Some Comparative Historical Reflections on State Policies and Performance

In his 1982 book, The Rise and Decline of Nations, economist Mancur Olson argued that over time, stable societies accumulate “distributive coalitions,” narrow special-interest organizations that complexify social life and burden the economy with overregulation and opaque forms of wealth redistribution. The notion that distributive coalitions are more often bad than good for economic performance, at least when they are not sufficiently “encompassing” to internalize the costs of inefficient redistribution, is pretty well accepted, but Olson’s thesis that political stability and the passage of time are the most important determinants of the number and power of distributive coalitions has been more controversial. One of the chapters of his book is an empirical test of the hypothesis on the 50 states. Olson finds that states settled earlier have higher rates of unionization and lower growth rates (in the 1960s and 1970s), except the former Confederate states, which “benefit” from the disruptive legacies of the Civil War and Reconstruction.

I am skeptical of Olson’s explanation for the growth of distributive coalitions, but his research does contain a kernel of truth. States that industrialized (note) early often show up on the bottom of economic freedom indices and usually have lower-than-average growth rates even today. Why is that?

To answer the question, we have look back at the social context of 19th century industrialization. The U.S. started out as an overwhelmingly rural, farming country. Industrialization populated the cities. Industrialization advanced first in those parts of the country that were unfit for export agriculture, benefited from high tariff walls on manufactures, and had a policy of free labor: southern New England, New York, and New Jersey. However, resource discoveries in the West also brought urban growth to California.

In 1900, the most urbanized states, by far, were Rhode Island (88.3%) and Massachusetts (86.0%). Then came New York (72.9%), New Jersey (70.6%), and Connecticut (59.9%). Pennsylvania (54.7%), Illinois (54.3%), and California (52.3%) were not far behind Connecticut. All of these states, with the possible exception of Pennsylvania, are now recognized as “deep-blue,” solidly Democratic states. Most of these states were relatively free for industry in the early 20th century, but they also boasted the strongest labor unions and most severe class conflict. These highly urban states became “proletarianized,” leading today to a strong concentration of Democratic votes in their metropolitan centers, according to Jonathan Rodden and other scholars.

As late as 1957, New Jersey was an example of a low-tax business haven. State and local taxes from all sources as a percentage of personal income stood at just 6.3% in New Jersey that year. Delaware had the lowest tax collections in the country, at 4.6% of income. States at the high end included Vermont (9.1%), which pioneered the state income tax, North (9.7%) and South Dakota (9.0%), and Oregon (9.0%). These states remained rural for a long time in part because prairie populism and Yankee progressivism yielded fiscal and regulatory policies that deterred investment. The South’s repression of blacks through Jim Crow kept their institutions “extractive,” to use Acemoglu and Robinson’s term, and their comparative development level low.

Nowadays, urbanization does not tend to produce proletarianization. Not many Americans are employed in manufacturing any more, nor are many private-sector workers covered by collective bargaining agreements. Thus, economic freedom has lost its self-undermining character. In the 1800s and early 1900s, economic freedom fostered industrialization, which brought on proletarianization, which led to a pro-regulatory public ideology, which then led to reversals in economic freedom. Now, late industrializers are not necessarily becoming less economically free. Indeed, there is a slight, positive correlation between present-day state urbanization rate and the Ruger-Sorens measure of economic freedom, controlling for left-right ideology.

States like California and New York are living off the accumulated capital of past economic freedom. Now that the political tide has turned decisively against economic freedom in those states, they are shedding people and jobs and growing more slowly than the rest of the country. Places like the Dakotas, Carolinas, Oklahoma, and Texas, which have reversed their anti-market policies of the past, represent America’s dynamic economic future.

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All You Need on Political Economy?

I had an interesting conversation recently about what were the three or four best all-time readings on political economy. If you could read, or have others read, only a handful of relatively short things, what would they be? That question is surprisingly challenging. Here are the suggestions of my interlocutors:

1. F. A. Hayek’s 1945 “The Use of Knowledge in Society.”

2. Frederic Bastiat’s 1850 “What Is Seen and What Is Unseen.”

Specifically on the topic of property, the suggestion was:

3. David Schmidtz’s 1994 essay, “The Institution of Property.” (This essay has been published in revised form in Schmidtz’s Person, Polis, Planet: Essays in Applied Philosophy (Oxford, 2008).)

I agree that the above articles are canonical, central contributions to the field. They should be included in any “Introduction to Political Economy” syllabus. What else should be included? I will post separately more detailed thoughts about this, including seminal works that challenge the broadly classical liberal worldview. But for now let me list a handful of suggestions.

First, I feel compelled to add something from among David Hume’s essays. He has so many, it is difficult to choose. Perhaps these two together:

4, 5. Hume’s “Of the Rise and Progress of the Arts and Sciences” and “Of Public Credit” (both available here).

I might also add two essays that, though coming from opposite ends of the political spectrum, come to remarkably—and, I think, frighteningly—similar conclusions:

6, 7. Albert Jay Nock’s 1939 essay, “The Criminality of the State“; and V. I. Lenin’s July 11, 1919 lecture delivered at the Sverdlov University under the name, “The State.”

A different list might include books and other longer formats. Keeping with the spirit of this list, however, what else would you include?

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Spending Cuts Can Be Popular

Marc Eisner notes the politics of fiscal irresponsibility. Such politics never seem to go out of style. Nevertheless, the coalition government in Great Britain is offering an object lesson in how to build political support for deep, wide-ranging cuts in government spending. With the UK’s finances in even slightly worse shape than the US’s, the Conservatives and Liberal Democrats have successfully made the case that there is no alternative. Here are some of today’s figures on polling on welfare cuts:

Making the long term unemployed spend 4 weeks doing unpaid work	All voters	CON voters	LAB voters	LD voters
Support	73	92	58	83
Oppose	17	3	31	14
Don’t know	10	5	10	3

Withdrawing Jobseekers Allowance from those who turn down a job offer or interview	All voters	CON voters	LAB voters	LD voters
Support	66	82	57	71
Oppose	21	8	33	22
Don’t know	12	9	10	6

More stringent testing for people receiving Disability Living Allowance	All voters	CON voters	LAB voters	LD voters
Support	69	86	58	70
Oppose	20	6	32	22
Don’t know	12	8	9	9

Putting a £400 a week maxium on housing benefit	All voters	CON voters	LAB voters	LD voters
Support	68	87	54	76
Oppose	20	6	37	12
Don’t know	12	7	10	12

Those are truly massive majorities.The British government is also cutting defense expenditures drastically and means-testing certain benefits, such as child care, so that the middle classes will no longer receive them. These policies are somewhat less popular but still enjoy majority support.

So how did they do it? One of the key requirements for the political “optics” of the cuts was the coalition government. With a social democratic party in the Lib Dems joining the Conservatives in supporting the cuts, the government was shielded from accusations of heartlessness or right-wing mania. Moreover, supporters of both parties outnumber Labour supporters. In the media, key Labour Party figures have been successfully characterized as “deficit deniers,” the people who caused the problem in the first place.

Coalition government is supposed to slow down the pace of change and create gridlock, just like divided government in the U.S. Nevertheless, it has worked well so far for Britain because it allows a formal structure that ties both parties to each other – neither party wants the coalition to fail, which would surely bring on a new election.

Unfortunately, this institutional characteristic of some parliamentary systems – endogenous election timing – is not available to American politicians. Nevertheless, Britain’s experience suggests that one way out of the fiscal mess in the U.S. would be a bipartisan, cross-chamber coalition of sorts, narrowly focused on solving the budget crisis. Given the midterm election results, the popular mandate is there for a radical fiscal house-cleaning, if anyone decides to take it up. Reasonable Republicans and Blue Dogs can join forces to create clear majorities in both houses and negotiate – in hard-fought, late-night sessions if need be – a package of radical spending reductions and tax reforms needed to close the budget gap.

With a bipartisan mandate, who could run against the results? The anti-tax-hike and anti-spending-cut extremists on both sides will be neutralized. President Obama will have no choice but to endorse the outcome of such a negotiation. Imagine if he vetoed the plan. He would clearly be the one responsible for shutting the government down if it came to that. He couldn’t blame the Republicans – because the cutters would have substantial Democratic support. He’d merely be making himself look even more liberal, which I’m sure his political advisors realize is not the key to victory in 2012.

We can dream, can’t we? As unlikely as this scenario sounds, the bottom line is that spending cuts need not be politically toxic. If you frame the debate as one of responsibility versus madness, voters will choose the former.

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American Exceptionalism Reconsidered, Pt. 2: The Size of the State

In this second part of a series of posts on American exceptionalism, I consider the common claim by the American right that the American state is particularly small relative to those of other advanced democracies, and that this fact helps to constitute a desirable “American exceptionalism,” featuring higher economic growth and more respect for individual liberty.

There is no doubt that the American state appears to be small in international comparisons, particularly when GDP is used in the denominator. Thus, public and mandatory private social spending (spending on old age, disability, unemployment, health, housing, active labor market policies, and similar programs) as a percentage of GDP was 16.3% in 2005, the last year for which data are available from the OECD. (This figure includes all levels of government.) By comparison, the figures for Sweden, the UK, and France were 29.8%, 22.1%, and 29.5%, respectively. The only rich democracies close to the U.S. were Canada (16.5%), Ireland (16.7%), and Slovakia (16.8%). The first point to make about these statistics is that they overstate the differences between the U.S. and apparently more freely-spending countries, because the latter group of countries, as a rule, also tends to tax social benefits at much higher rates than does the U.S.

However, a broader measure of government impact on the economy also seems to support the American exceptionalism thesis.

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