Thursday, June 16, 2011


Big-Government Man

by Tequila Kid

I'm  a big-government man. Not that I want to maximize the size of government come hell or high water, but I do believe that the size of government should never be allowed to sink beneath a certain proportion of the economy -- say 30 or 40 per cent. Furthermore I think large utilities like big power companies, ports, railroads, airports, electrical grids, highways and schools, post office. etc. should be state-owned.

Furthermore I believe that there are sound reasons of economic efficiency to support a hefty government sector of the economy. This is a well-established thesis that the right has done  its utmost to efface, but in vain, alas! Every economist knows that in an economic slump, private businesses reduce expenses and the state’s expenses grow because it must now pay unemployment compensation, etc. Thus the government willy nilly has to increased its own demand in response to a fall in demand by the  private  sector.

So that a considerable government role in the economy is desirable from the get-go, for reasons of macroeconomic stability. In order for these  so called automatic stabilizers to be effective in making up for lack of private investment, the government has to be fairly chunky.

I think that utilities should be nationalized and run by the state.  Mexico is an inspiring example of how the  life of the very poorest can be greatly improved  by electrical power (1). The Mexican state-owned  electrical power monopoly CFE plans investment in new power lines according to demographic forecasts, not according to  income projections.

You may object that then many lines will serve people that lack the money to pay!

And I reply that’s the beauty of it, the CFE charges the poor only 3% of what they charge the rich.  CFE makes a profit anyway. So in Mexico everybody has electricity, even very poor people. Compare that with South Africa, where private utilities have ceased serving certain neighborhoods because of no payments. South African poor have suffered greatly for years because they were unable to pay their bills to the  privately owned utilities.

That’s why I think utilities should be government-owned. That way the rich pay a higher price than the poor. For example in Britain, when the electrical power companies were privatized in the 1980s, the private  companies altered the fee scales and did away with  rebates for pensioners and other low-income people. So that Margaret Thatcher’s privatization  made the rich  richer and the poor poorer. This is a recurring pattern.

Furthermore in the case of very large enterprises like CFE, government ownership is not a factor that reduces efficiency very much, as opposed to small businesses. After the Brtitish privatization, no increase was registered in the newly private companies’ efficiency.  This naturally reflects the high standards of British civil servants, who of course received none of the profits.

An additional reason I love big government is that  government is capable of compensating for and counteracting  market failures.

This is a bit of a sore point. Libertarians denounce market failure theory because existence and admission of market failures don't  fit their plans for society. They must keep alive the illusion that an individual decision maker is at work.  But contrary to popular belief, existence of market failure does not automatically imply government intervention. Various sorts of government measures can be considered, but the option of the government doing nothing at all should always remain available. Then there is the option of public non-government entities conducting economic policy instead of government. I haven’t looked into this issue at all, so I'll just keep quiet about it.

I don't know to what extent there are non-governmental solutions to certain sorts of market failure.

Also, to a great extent, Government has the power to structure the business environment so that people behave ethically. Who put ingredient labels on grocery cans? Was it the private sector or the public sector?

Since private returns from investment  in human capital formation are low, people don't like to spend money on education. However the social returns are much higher. So there are excellent reasons for government to make up for the private citizen’s stinginess when it comes to education. 

 (1)  My description of Mexico reflects the 1980s. I cannot vouch for the current situation.