What determines the ability of democratic governments to cope with their responsibilities?

I ended my last post suggesting that the greatest threat to human progress over the next few decades is that democratic governments will not be able to cope with the increasing responsibilities that seem likely to be placed upon them, particularly in high-income countries.

The most straight forward aspect of this question is the economic effect of increases in government spending and taxation. (I have discussed this previously here and here). It is well known that the economic cost of taxation rises disproportionately with tax revenue because taxpayers substitute non-taxed goods (e.g. leisure) for taxed goods. (The economic cost is roughly proportional to the square of the tax rate.) There are also economic costs associated with government spending that inadvertently discourages participation in productive activity. These costs can be reduced to some extent by tax reforms (e.g. broadening the base in order to lower the rate) and various measures to reduce the disincentive effects associated with government spending. As the economic costs have risen, some countries with big governments (e.g. Sweden) have introduced various reforms that have had the effect of containing the growth of government spending and reducing marginal tax rates.

 

So, if the economic costs of big government become too high, governments can take action to reduce those costs. Where is the problem?

The problem is that countries differ greatly in their ability to cope with the problems of big government – in terms of both raising revenue and managing provision of services, and implementing tax reforms etc. if that becomes necessary. Sweden seems to be able to cope with government spending that is still around 50 per cent of GDP without too many problems, whereas Greece was on the way to becoming a basket case before its government spending reached that level.

The wide variation in the effectiveness of government in OECD countries with big governments is apparent from the chart below. Size of government is measured by OECD data on government spending (General Government Total Outlays) as a percentage of GDP averaged over the five years ending 2007. Government effectiveness is measured by the relevant World Bank governance indicator which reflects, among other things, perceptions of the quality of the civil service and its independence from political pressures, and the quality of policy formulation and the credibility of the government's policy commitments.

I chose the period prior to the global financial crisis (GFC) in making this comparison to see to what extent the indicator of government effectiveness predicts how countries have fared subsequently. It predicts that three of the PIIGS - Italy, Greece and Portugal - might have problems in coping, but that Ireland and Spain would be less likely to have problems. Failure to predict problems in Ireland and Spain could be attributed to deficiencies in both the indicator of government effectiveness and the indicator of size of government. In relation to effectiveness, it does not seem consistent with effective governance for bond holders of banks to be viewed as ‘consenting adults’ when the future looks rosy and then subsequently issued with guarantees when the future becomes uncertain. In relation to size of government, it could also be argued that government spending was a poor indicator prior to the GFC because it didn’t take account of the contingent liability associated with implicit guarantees for bond holders of banks. For example, in the case of Ireland, a better measure of the size of government might have anticipated in some way the subsequent increase in government spending from around 34 percent of GDP in 2006 to 67 percent in 2010.

Leaving measurement problems aside, it seems reasonable to argue that the ability of democratic governments to cope with the responsibilities being placed upon them will depend on the extent of those responsibilities and on the effectiveness of the governments concerned. The question that needs to be considered is whether democracies are changing in ways that are likely to contribute to or detract from the effectiveness of government, or add to or subtract from the responsibilities that are placed on government. If effectiveness is rising and responsibilities are contracting, the future of democracy looks rosy. If effectiveness is falling and responsibilities are expanding, democracies may be heading for collapse.

In my next post I will consider whether John Keane’s observation that we now have ‘monitory democracy’ has implications for the relationship between the responsibilities and effectiveness of government, and hence the survival of democratic institutions.

What is the greatest threat to human progress?

It seems pretentious to be posing this question for myself. But the question is difficult to avoid in the book I am writing. It might help me to take it out of the ‘too hard’ basket and get my ideas straight if I try to draft an answer here first.

The background is that the world has seen massive human progress over the last three centuries. Human societies have generally become much more peaceful; the opportunities for individuals to live lives that they value have expanded greatly in much of the world; and people in many countries now enjoy a great deal of economic security. From what we know about the drivers of this social progress it would be reasonable to expect this process to continue as long as conditions remain broadly favourable.

Whenever I read statements like ‘as long as conditions remain broadly favourable’ I begin thinking up reasons why conditions will not remain favourable. That response probably has something to do with being human. Loss aversion probably makes us sensitive to future threats to our quality of life, so that we can avoid them.

Matt Ridley suggests in ‘The Rational Optimist’ that loss aversion makes people ‘naturally gloomy’ about ‘the future of society and the human race’. He argues that for 200 years those preaching doom and gloom ‘have had all the headlines, even though optimists have far more often been right’. I think he overstates his case. I am old enough to remember what today seems like a naive faith in progress that seemed to pervade western society in the 1950s and ‘60s, despite a real risk of nuclear Armageddon during much of that period. Even today there is a fair amount of optimism in reporting of scientific progress. Slow progress is being made in treatment of cancer, for example, but press reports of breakthroughs often seem to paint an excessively optimistic picture.

I agree with Ridley that there has been a tendency to forecast the future on the assumption of no technological change and to find it dire. Ridley quotes Paul Romer: ‘We consistently fail to grasp how many ideas remain to be discovered’. Most gloomy prognostications about the world running out of resources and the potential for widespread famine should be heavily discounted on those grounds. Disease pandemics are a greater threat, but we have lived with this threat at least since the beginning of urbanization and scientific progress has been improving our ability to cope.

While optimists have generally been on a winning streak over the last few centuries that cannot be because perceived threats are always exaggerated by gloom and doom merchants. The threat of a major nuclear war is a case in point. As Ridley acknowledges: ‘There were very good reasons to be a nuclear pessimist during the Cold War’ (p 299). Everything that I have read about the Cuban missile crisis of 1962 suggests to me that this could easily have escalated to nuclear war, despite mutually assured destruction. Steven Pinker seems to me to make a strong case that a taboo against use of nuclear weapons emerged gradually as a result of pressure of public opinion rather than because military and political leaders decided spontaneously that use of such weapons of mass destruction would be futile (‘The Better Angels of Our Nature’, pp 268-271). In my view Gregg Easterbrook is right on target in his observation that ‘historians will view nuclear arms reduction as such an incredible accomplishment that it will seem bizarre in retrospect that so little attention was paid while it was happening’ (‘The Progress Paradox’, p 70).

It seems to me that the only known threat we face that could rival the threat of nuclear Armageddon in terms of severity of its impact is climate change. Even in that context, however, the threat of human-induced climate change seems likely to be much less severe than the aftermath of a major nuclear war (or infrequently occurring natural occurrences such as super-volcanoes and asteroids). I have written recently about human-induced climate change (here and here) so I will be very brief. The most likely outcome in my view is that the world will stumble on toward a reduction in greenhouse gas emissions, relative to what would otherwise occur. This will not prevent climate change, but the general story is likely to be one of successful adaptation. It is within the bounds of possibility, however, that climate change could accelerate and the costs of adaptation could begin to rise steeply within the next few decades. It therefore makes sense for governments to take precautions by contributing substantially to funding of research to mitigate climate change.

There are other potential threats to the quality of life over the next few decades that apply particularly to high-income countries. Globalization and technological progress will continue to have the potential to raise overall living standards in these countries, but there seems to be a fair chance that the distribution of benefits will become more unequal and jobs will become less secure. There are some good reasons why the aphorism, ‘a rising tide lifts all boats’ should be questioned. The forces of globalization are likely to subject an increasing proportion of occupations, including some occupations requiring substantial skills, to increased international competition. It is also possible that technological progress will impact unevenly in ways that benefit some groups (e.g. successful innovators, owners of robots) and disadvantage others (e.g. those whose skills are becoming redundant). If that happens, expressions of collective guilt/responsibility, like this one by Jim Belshaw on his blog yesterday, are likely to become more common:

‘We talk about the need for management and people flexibility in that most basic area, secure employment. We say that a young person will follow multiple career paths in their lives. Yet we do nothing to address the most basic questions: how might this actually work? How do we create a world that might provide the desired business and personal flexibility? How do we give people a degree of certainty about their own lives in an unstable world?’

It seems likely that governments in high-income countries will come under increasing pressure to provide people with a greater degree of economic security. If we are to avoid a return of protectionism – protecting  existing jobs at the expense of new job opportunities - more adjustment assistance may need to be provided. This could involve more government assistance for retraining of people whose skills are becoming redundant and broadening social welfare safety nets that are already coming under increasing stress as a result more predictable developments such as the rising age structure of populations.

Some people are concerned about a rather different potential threat to the quality of life in high income countries. This is a concern that rising affluence brings with it epidemics of obesity, diabetes, depression, and other ills of modern life. (See for example Jeff Sach’s introductory chapter in ‘World Happiness Report’, 2012.) Such concerns seem likely, increasingly, to convert the problems that individuals and families have in making good use of the opportunities available to them into ‘social’ problems that governments are called upon to address. For example, some governments (including the Australian government) are already taking increasing responsibility for preventative health care, weakening the responsibility of individual adults to manage their own lives.

It seems to me that the greatest threat to human progress over the next few decades arises because threats to human progress seem to provide a compelling case for collective action - the threats to human progress discussed above give rise to greater demands on government. As I see it, the greatest threat we are faced with over the next few decades is that democratic governments in high-income countries will not be able to cope with the increasing demands that seem likely to be placed upon them.

I will write about that in my next post.

Postscript:
For a highly relevant recent discussion of effects of globalization and technological change on income distribution see: Jonathan Haskel, Robert Z. Lawrence, Edward E. Leamer and Matthew J. Slaughter,
'Globalization and U.S. Wages: Modifying Classic Theory to Explain Recent Facts', Journal of Economic Perspectives (26) 2, Spring 2012.

How does democracy manage to survive?

In recent posts I have been discussing the rational irrationality of voters – Bryan Caplan's concept explaining how it can be rational for people to cling to irrational beliefs on political issues because there is a miniscule probability that the vote of any individual will be decisive in changing the result of an election. In my last post I provided some evidence that voter irrationality tends to expand the role of government. People who say that politics is not at all important to them are more likely than others to say that ‘the government should take more responsibility to ensure that everyone is provided for’. Many of these people exercise their right to vote even when there is no compulsion for them to do so.

It is not surprising, therefore, that democratically elected governments have a tendency to take on responsibilities that they can’t cope with. When voters demand that governments take more responsibility to ensure that everyone is provided for politicians have an incentive to respond by increasing government spending and regulatory interventions to help the needy and to protect jobs. If governments don’t raise taxes to cover increased spending, their debts grow until they are eventually unable to meet interest and repayment obligations, or to pay any other bills. If governments keep on raising taxes or imposing additional regulation to ensure that everyone is provided for they must eventually dampen incentives for productive activity to such an extent that incomes (and tax revenues) begin to fall. In either eventuality it seems reasonable to expect voter irrationality to lead to economic collapse and eventually to the collapse of democratic government.

The scenario sketched out above occurs frequently enough, but not as often as might be expected. Democracy seems to have been a fairly robust form of government in many countries, despite the rational irrationality of voters. Why is it so?

There are several possible answers to this question but the one that Joseph Schumpeter gave about 40 years ago in ‘Capitalism, Socialism and Democracy’seems to me to deserve more attention.  Schumpeter suggested that democracy doesn’t actually exist. He provided a definition of democracy consistent with the way most people would think democracy should function and then proceeded to show that democracy doesn’t exist in those terms. He then redefined democracy in a manner more consistent with the way governments that have the ‘democratic’ label attached to them actually function.

Schumpeter’s first definition of democracy was:

‘that institutional arrangement for arriving at political decisions which realizes the common good by making the people itself decide issues through the election of individuals who are to assemble in order to carry out its will’.

That definition seems to me to capture the expectations that most people would have of the way democracy is meant to work. Democracy is often defined simply as ‘government by the people’, but if the people are to govern they must have a collective ‘will’ and a mechanism for this to be carried out to realize a ‘common good’.

 In showing that a democracy of that kind can’t exist Schumpeter made several points:

• There is no such thing as a common good that all people could agree upon. Differences of principle on questions involving ultimate values cannot be reconciled by rational argument.
• There is no common will; opinions differ on the means that should be used to pursue agreed objectives.
• The psychology of crowds and groupthink are opposed to rational consideration of issues. 
• Incentives for rational decision-making that discipline individuals in their daily life in the home and in business are absent in political decision-making.

Schumpeter placed a lot of emphasis on the final point, explaining that it gives rise to what we now refer to as rational irrationality:

‘All this goes to show that without the initiative that comes from immediate responsibility, ignorance will persist in the face of masses of information however complete and correct. It persists even in the face of the meritorious efforts that are being made to go beyond presenting information and to teach the use of it by means of lectures, classes, discussion groups. Results are not zero. But they are small. People cannot be carried up the ladder.

Thus the citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyses in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again’.

According to Schumpeter, citizens are prone to ‘extra rational or irrational prejudice and impulse’ in political matters. He argued that this made them particularly vulnerable to influence by interest groups. Citizens are more vulnerable to political persuasion than to commercial advertising because they have less opportunity to test the claims that are made.

Schumpeter’s second definition of democracy was:

‘that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote’.

This captures the idea that the central feature of democracy, as actually practiced, is a competition for leadership. Schumpeter argued that democracy could only succeed in those terms if it was constrained in various ways. In particular, he argued that the ‘effective range of political decision should not be extended too far’. He seems to have had in mind parliamentary rules, such as those that ensure the government (political leadership) retains a high degree of overall budgetary control, as well as ‘constitutional’ arrangements that remove aspects of policy administration requiring particular expertise (e.g. monetary policy) from the political arena.

It is interesting that the emergence of stagflation in the 1970s led to fears that democracy might not be able to survive in the longer term unless democratic politics was constrained. (I have in mind particularly the discussion by Friedrich Hayek in 'Law, Legislation and Liberty' Vol.3, Chapter 16.) The economic reforms introduced during the 1980s and 90s reduced such concerns in some countries by giving greater independence to central banks and making governments more accountable for budget outcomes. In Australia, such reforms have taken monetary policy largely out of the political arena and made failure to maintain budget balance a much greater political liability for governments. In my view, further moves should be made in this direction to shield economic policies from political pressures that exploit voter ignorance and irrationality.  For example, better government could be achieved by adoption of a convention that advice from the Productivity Commission will be sought as a matter of course prior to legislative changes in a range of policy areas. I don’t imagine that there would be much opposition from the community at large to adoption of such a convention.

However, in most democratic countries, including Australia, there would be a fairly widespread reluctance to accept Schumpeter's advice that democracy should be constrained to such an extent that the only involvement of citizens is participation in the election of a leader. It would probably be considered laughable these days for an economics professor to try to tell voters that ‘they must understand that, once they have elected an individual, political action is his business and not theirs’.

Joseph Schumpeter probably went too far in claiming that democracy can only succeed if voters refrain from telling politicians what to do after they have been elected. He would have been on safer ground in suggesting that democracy can only succeed if citizens are willing to show some respect for political leaders who take positions that are politically unpopular. It would also be fairly safe to argue, as suggested here a few weeks ago, that political leaders who prepare the ground for reform by attempting to raise the level of public discussion of issues will often be more successful than those who show great courage in attempting to forge ahead ignoring opposition. I doubt whether Paul Keating actually had much success in explaining the J curve to the Australian public (when he was Treasurer in the 1980s) but his attempt to do so probably won him some respect.

 Cartoon by Nicholson from “The Australian” newspaper: www.nicholsoncartoons.com.au

How concerned should we be about voter irrationality?

I heard Gary Gray, a minster in the Australian government, hold forth last week about the 1.5 million Australians who have a right to vote but are not on the electoral roll. He referred to this as ‘a blight on our electoral roll and the integrity of our system’. Such comments may be understandable within the context of the compulsory voting system in Australia, but does compulsory voting make sense? Would it not be more sensible to discourage people from voting if they do not see exercising their political rights as having sufficient importance to take the simple steps necessary to enrol and vote?

As I noted in a recent post it can be rational for voters to cling to irrational beliefs on political issues because the cost is low - there is a miniscule probability that the vote of any individual will be decisive in changing the result of an election. This explains the persistence of a wide disparity between views of voters and experts on many issues and why views of voters are often internally inconsistent e.g. simultaneously supporting reductions in government spending while supporting increases in many individual areas of spending.  It seems reasonable to expect that people for whom politics has no importance would be most prone to cling to such irrational positions.

How likely is it that people who have no interest in politics could have a decisive impact on election results? Figure 1, constructed from World Values Surveys in the period 2005-07, suggests that it is very likely. A considerable percentage of people in high-income democracies say that politics is not at all important in their lives. The percentages are relatively high in Italy, France and Britain, and relatively low in Sweden, Norway and Japan.

There is no reason why everyone should view politics as having some importance in their lives. You might expect, however, that people would be unlikely to vote unless forced to if politics had no importance to them. Figure 1 suggests, however, that a relatively high proportion of these people do vote in most of the countries shown.

Some people might suggest that it probably doesn’t make much difference if people vote even when politics has no importance in their lives because random votes would tend to cancel out. Unfortunately, however, there is evidence that the votes of such people are not random. Figure 2 suggests that those for whom politics is ‘not at all important’ are more likely than others to say that ‘the government should take more responsibility to ensure that everyone is provided for’. Just think about that for a moment. How can they expect governments to take on more responsibilities if people like themselves have little interest in politics, which is largely about holding governments accountable for the way they exercise their responsibilities?

Perhaps some readers might be thinking that the people who say that politics is not at all important in their lives might actually take some interest in politics, particularly at election time. After all, some of us sometimes show some interest in sports on TV that we would claim are not at all important in our lives. The results of the World Values Surveys shown in Figure 3 suggest, however, that the extent to which voters are interested in politics is closely related to its importance to them. The Figure has been constructed from responses for the countries shown in Figure 1. (The columns add to 100% on the depth axis.)

Voters who say that politics is not at all important in their lives tend to have relatively low confidence in political parties – 43% saying that they have no confidence at all in political parties, versus 19% for all voters. That might make some readers wonder whether their desire for governments to take on more responsibility could be explained by relatively high confidence in the civil service. While the percentage with a great deal of confidence in the civil service is higher than the average for all voters – 4% versus 3% - the percentage with no confidence at all in the civil service is substantially higher – 18% versus 9%.(The data are for the countries shown in Table 1).

Some other characteristics of voters who say that politics is not at all important in their lives might be of interest. Their self-positioning on the left-right political spectrum is not markedly different from that of other voters. They are less likely to say that democracy is absolutely important (47% versus 60% for all voters) and more likely to say that it is good to have experts make political decisions.  They tend to be disproportionately either young (15-24) or old (65 or older); less well educated; and female (57%). They are less likely to rate the state of their health as very good (24% versus 30% for all voters) and more likely to rate it as poor or very poor (33% versus 24%). They tend to be conservative in their views on social issues (divorce, abortion, homosexuality and prostitution).They have a greater tendency to rate the fight against crime as an important goal (29% versus 19% for all voters). They are less likely than other voters to be members of religious, sport or recreation, or charitable organizations and are less likely to rate friends as very important. They are much less likely than other voters to agree that ‘most people can be trusted (29% versus 46%)

.

Should restrictions be introduced on the right to vote in an attempt to exclude people who have no interest in politics? It is not obvious how this could be done. Removal of compulsory voting requirements would make sense in Australia as a step in that direction. The experience of other countries suggests, however, that making voting voluntary would not do much to discourage people who have no interest in politics from voting.

It might be desirable to promote a cultural change away from the view that voting is a civic duty towards the view that people should refrain from voting unless they have some interest in politics. Policy outcomes would probably be worse than at present, however, if the political field was left to be fought over by people who are strongly interested in politics because of their links to narrow interest groups. A battle among interest groups could be predicted to benefit the groups that able to marshal their members effectively at the expense of broader community interests.

In order to work satisfactorily, democracies need a substantial proportion of citizens who do not have strong links to narrow interest groups to inform themselves about public policy issues, to take part in public discussion of such issues and to encourage others to do likewise. To the extent that this is happening it can probably be most readily explained in terms of public-spirited identity perceptions – i.e. individuals who see themselves as being the kind of person who does that kind of thing and gaining satisfaction from acting in that way. How could more people be encouraged to do this?