How Much Government Is Good for Growth?

(Bloomberg Opinion) -- What can policy makers do to increase U.S. economic growth and what role should government play? Bloomberg Opinion columnists Noah Smith and Michael R. Strain recently met online to debate.Noah Smith: I think we both agree that Americans are upset because they aren’t better off than their parents. Growth is the lubricant that makes an economy function. But how do we produce faster growth?.For years, the conversation was captured by the idea that cutting taxes and slashing regulations was the key to making the economy grow faster. But the repeated failure of tax cuts to deliver capital investment booms or rapid wage growth shows that a growth agenda can’t rely on small-government methods anymore. Progressives need their own growth agenda, focused on government activities that complement private business -- better infrastructure, more scientific research, more immigration, denser and more affordable housing, fewer powerful monopolies, and a government health-insurance system that relieves employers of the burden of providing health insurance for their employees. It’s this agenda, and not a Reaganite program of smaller government, that can deliver the growth Americans crave..Michael Strain: More immigration and more housing seem like supply-side solutions that we can agree on -- so there’s no need to cast doubt on President Reagan’s wisdom. Better infrastructure we can agree on, as well, though that would surely require some of the deregulation you seem to think is ineffective. Employers don’t seem to mind providing health insurance for their workers, and workers seem to like the arrangement as well -- I’m not sure how this would increase growth. And we are in complete agreement on funding for scientific research, which could fuel basic innovation..Let’s step back. We can increase growth by expanding the workforce and by making the workers more productive. Conservatives are right that big government gets in the way. The current structure of our disability insurance program, for example, keeps people out of the workforce. A $15 an hour federal minimum wage would significantly shrink the workforce, as well. Productivity is more mysterious, but a high-regulation, high-tax government regime surely isn’t helping technology, innovation and efficiency to advance..NS: Well, let’s examine some of these ideas. Because of the employer-sponsored health system, people can’t change jobs because they’d lose their health care for however long it takes to find a new job. This freezes workers in place, prevents talent from being reallocated between companies, and prevents ideas and expertise from flowing between companies. But if the government took over health insurance, people could change jobs freely, leading to greater dynamism. It would also make hiring workers a simpler task for small businesses..Better infrastructure isn’t going to magically appear if we deregulate. It’s something government has to build and maintain. Deregulation would produce more housing for the middle class, but wouldn’t do much to help poor people, since it's not economical to build low-income housing -- it has to at least be government-subsidized..So big government is needed. And in addition to improving health insurance, housing and infrastructure, big government might be able to push companies to increase exports. A more vigorous program of assistance and encouragement for small and medium-sized businesses could push them to raise their productivity and discover untapped international markets..MS: Yes, I understand the theory for your health policy reform. But many were surprised by how few companies stopped offering their employees health insurance after the enhancement of similar incentives under Obamacare. Though if you are saying that we should outlaw the private provision of health insurance — well, that would be big government. In that case, reducing job lock could make the economy bigger under the theory you outline, but it’s not clear why it would have more than a negligible effect on the economy’s longer-term rate of growth. And I would be quite surprised if the net effect of your plan would be pro-growth over the long run. Excluding the private sector would make it harder for the hospitals and physicians to find innovative ways to deliver higher quality health care, and would likely be a drag on productivity. And an exclusively government run system would require trillions of dollars in additional tax revenue, which would dampen economic growth..Government nudges for the development of low-income housing and infrastructure may or may not be good ideas, but I don’t think they qualify as big government..So is that where we land on your agenda? A vast expansion of government’s role in health care, huge tax increases to finance it, some marginal changes to incentives in other areas -- and the claim that, on balance, this agenda is pro-growth? If enacted, we would need a much stronger small-government push than we do today..NS: The small-government agenda has little to offer except wringing a few more hours of low-wage labor from the country’s struggling working class. Cutting disability insurance to force disabled people into the workforce, or eliminating minimum wage laws to allow people to work for pittances, don’t seem like the kind of policies that will either supercharge the economy or make Americans feel that they’re doing better than their parents..As for the idea that an ambitious small-government agenda would super-charge growth, I demand to see some evidence. The U.S. repeatedly cut taxes in recent decades, and deregulated the financial industry. But the results -- in terms of investment growth, wage growth and overall economic growth -- have been decidedly less than impressive. They say that insanity is doing the same thing over and over again and expecting different results. Where’s the evidence that trying to drown government in a bathtub will work better next time?.In general it’s very hard to do anything that increases an economy’s trend rate of economic growth for years and years. The best a country can hope for is to open up new frontiers -- technological revolutions, geographic expansions, demographic booms or foreign trade. By advancing scientific research, building more housing, drawing in more immigrants, and promoting exports, the U.S. government has the chance to pry open new frontiers for private business..MS: It seems we are ending on a place of agreement: we should open up new frontiers, advance scientific research, build more housing, and draw in more immigrants..Much of our conversation has hinged on framing. I thought it would be cheating to do this earlier, but since you’ve given me the last word, I will do it now: I would reject the dichotomy you present between big and small government. Instead, I would argue for a government committed to individual liberty and personal responsibility, and that advances economic opportunity and free enterprise. In some cases, that government would spend more money than the U.S. currently does. For example, on earnings subsidies. In some cases, that government would be less heavy-handed -- it would never allow a $15 minimum wage..It would end up being smaller and less intrusive than a government with Medicare for All. It would spend less than ours does today. But more importantly, it would spend with more wisdom. .To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion..Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”.©2019 Bloomberg L.P.

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How Much Government Is Good for Growth?

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