Matt Yglesias writes:
Meanwhile, one needs to understand that, somewhat counterintuitively, when you have a very efficient economic sector what happens is that
it tends to go away. Consider agriculture. Our modern-day agricultural
technology is way better than what was available 200 years ago. But
agricultural progress hasn’t meant that everyone goes to work in the
super-charged high-tech agriculture of the future. It’s meant that more
food than ever is grown with fewer person-hours of labor than ever. We
should expect this to continue apace. For all the talk of trade’s
impact on American manufacturing, the bigger issue has been automation
and robots. But either way, even though people will continue to consume
manufactured goods–just as we still eat–manufacturing will be a
less-and-less important part of the economy. Not because manufacturing
“isn’t important” but because it’ll get more efficient. And that’s how
the whole private sector part of the economy will go. Markets, doing
their work, will make those sectors more and more efficient leading
them to shrink as a share of the overall economic pie.
What will be left is big government. Or, rather, bigger and bigger government.
it tends to go away. Consider agriculture. Our modern-day agricultural
technology is way better than what was available 200 years ago. But
agricultural progress hasn’t meant that everyone goes to work in the
super-charged high-tech agriculture of the future. It’s meant that more
food than ever is grown with fewer person-hours of labor than ever. We
should expect this to continue apace. For all the talk of trade’s
impact on American manufacturing, the bigger issue has been automation
and robots. But either way, even though people will continue to consume
manufactured goods–just as we still eat–manufacturing will be a
less-and-less important part of the economy. Not because manufacturing
“isn’t important” but because it’ll get more efficient. And that’s how
the whole private sector part of the economy will go. Markets, doing
their work, will make those sectors more and more efficient leading
them to shrink as a share of the overall economic pie.
What will be left is big government. Or, rather, bigger and bigger government.
I would make a few points. First, some progressives wish to argue that government is fairly efficient (low Medicare overhead costs is a common observation here); in those sectors this argument won't apply. Second, if a given activity could go to either the private or public sector, we might be reluctant to stick it in the less-productivity-enhancing public sector. Third, many government activities should benefit greatly from private sector technological advancement (electricity, cars, internet, etc.), yet we don't usually observe those sectors shrinking rapidly, as a percentage of gdp, as a consequence. This should worry us. Still, there is truth in Matt's basic observation.
Waaaaaahhhhhht?
There are so many things wrong with that argument that it’s difficult to know where to begin.
First, it doesn’t follow that more automation in manufacturing will necessary mean fewer works. Fewer workers per unit produced now, yes. But new products and more volume means that more efficient doesn’t necessarily mean fewer workers. And that’s without even getting into the relative weakness of the dollar to foreign currencies going forward. The U.S. may have another industrial revolution in its future thanks to profligate monetary policy. (Incidentally, I don’t think that would necessary be bad for our culture.)
Second, why shouldn’t other sectors of the private economy not increase faster than government? Because (at least our) government is (largely, see Ribstein and O’Hara on the Law Market) insulated from the disciplining effect of competition, as “customers,” we should always be demanding government to justify its jurisdiction. If Yglesias is making a positive point here, fine. But as a normative matter there’s no reason to resign ourselves to a bigger and bigger government.
Third, … oh I’m tired already.
Just on the face of it, I don’t see all that much in Matt’s argument. In 2007 government at all levels spent about 36% of the GDP, including transfer payments and interest, up by about 4 points from, say, 1979, before the bad Republicans. If you pare that down to just the value added of government (taking out transfer payments, about a $trillion for stuff it bought from the private sector, and most of its “investment”, which it also bought mostly from the private sector), that value added in 2007 was only a little over 11% of GDP, down almost a point from 1979. So I don’t see the growth in spending that’s not subject to private sector possibilities for efficiency gains, unless you propose the government takes over more private sector activity (say, health care, like the Brits). Of course a lot of what the government buys or pays for may be in those parts of the private sector that don’t gain much in productivity (maybe because the govt pays for it), but that’s another argument.
This is a weird way of looking at relationship between the public and private sectors. Mainly because Matthew is assuming the number of sectors of the economy is fixed. He should remember, the economy not only grows in efficiency but in complexity, so relationship between the private sector as a whole and private sector doesn’t hold water. I think we should look for the phrase “fallacy of composition” to come up somewhere in the other comments, hopefully else someone will point out the fallacy of using GDP% as a measure of the importance/productivity/usefulness of an industry.
Matt Yglesias is absolutely correct.
All labor intensive services seem to have had lower productivity growth than Ag and Mfg in the past: How much more productive is a symphony orchestra now than it was in the 19th century? Anybody wanna hear the Firebird Suite played faster? Quartet pieces written for trio? Seems as though government has become stuck with such stuff. This is a challenging measurement problem completely separate from the questions of how big government should be, and how much influence government has on its own productivity growth.
In the US, we have an ever so slightly small government sector compared to similarly rich countries, for better and for worse.
Matt Y is incorrect here. The gap caused by the undoubtedly shrinking manufacturing sector will not be filled as the night follows the day by the government, but by the service sector–accounting services, computer-delivered services (those that are not invested in manufacturing, such as search engines, online retailing, etc.), etc., etc.
Government may well grow as a percentage of GDP, but it must have some limit, unless we’re going to end up like North Korea only with a slightly less nasty dictator, maybe a descendant of the current vice president, who is one of the nastiest pols alive, and dumbest.
Absolutely. We see this happen all the time. I don’t think of it quite the same way as he does however.
If you treat government as a microeconomic monopoly. You can see it tries to maximize its absolute size/profits/growth/etc at the expense of the “consumer” (in this case the citizenry).
Because government is trying to maximize its absolute size, it has a maximum size relative to the economy as a whole. When governments get too “greedy” and take a larger percent than what maximizes its absolute size, its absolute size is smaller. We can compare the government of North Korea and South Korea for examples of how this works. Relative to their own economies SK has a much smaller government than NK, but in absolute terms SK’s is larger.
Increases in the efficiency of the private sector mean that the government at maximum absolute size will take a larger and larger chunk of the economy as a whole.
The effect that Matt Yglesias sees is a natural result of government being a monopoly and comes straight out of microeconomic theory once you start actually treating government as a monopoly.
Libertarians and others who want small government, should encourage laws that allow people to change their governments more easily. Governments that allow for easy migration would begin to behave more like oligopolies (for example compare US states to each other and nowadays EU member countries are beginning to behave like oligopolies.)
Look before you leap; measure before you criticize.
I would be very wary of making any of these arguments, on any side, on numbers alone.
I guess the size of goverment will depend on the same things… ideology, the political system, people’s preferences on public goods, private goods, freedom and liberty, etc…
This sounds like a lesson from Introduction to Macro where we assume that Acme Widgets is the only company in the economy, who employs the only 10 workers in the country. It might work to teach a general lesson, but goes to hell when you try to apply it to today’s economy.
I think Frank has it wrong. A symphony orchestra is more efficient now than it was in the past. That orchestra today can record a concert or play it live via television or the web, so that millions can enjoy (and potentially pay to enjoy) that that one concert.
I think this is similar to the argumnet made by Baumol many years ago in a paper about the Dynamics of Unbalanced Growth. I believe his argument was that the relative share of employment in the less productive sectors (e.g., governmnet) should grow relative to the share in the more productive sectors. There was some neat insight in that paper, but my memory isn’t good enough to remember it – I will try to locate the article and see.
It is interesting to me that education has become vastly cheaper today with the internet and TV/radio. Now baby sitting and testing (credentialing) have not gotten that much cheaper but they have become cheaper and yet Government which dominates the baby sitting and testing (credentialing) markets have continued to get more expensive. Government acts as if nothing has changed.
It is interesting to me that today most education is free but diplomas are very, very costly. Why?
“How much more productive is a symphony orchestra now than it was in the 19th century?
Vastly. In the 19th century, a single performance was able to satisfy, at most, a couple thousand listeners in a single location only once, whereas now a single performance can satisfy millions of listeners, all over the world, repeatedly and indefinitely — at virtually zero cost. The productivity of symphony orchestras has increased so much that it threatens to make the industry industry (which could not exist without large subsidies) redundant.
In fact, past productivity was such that for my own limited (but pretty typical) orchestral music needs, the entire (taxpayer dependent) industry of symphonies and music schools could now be shut down, and the money and human energies turned to more productive uses.”
The better argument is that thru leaps in audio technology one person has the ability to replicate an entire orchestra (though not yet perfectly).
There is another idea that as things get cheaper we the saving in transactions costs become greater that losses due to the inefficiency of government.
“The big challenge is still coming up with an excuse for giving everyone enough purchasing power to keep the more productive sectors from collapsing”
Also known as collective ownership of the means of production. There isn’t that much news under the sun.
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