Why government is good: theory, and maybe a little evidence too

Paul Krugman rightly blasts the "zombie" Reaganite ideology of "government intervention in the economy = bad":

Washington, it seems, is still ruled by Reaganism — by an ideology that says government intervention is always bad, and leaving the private sector to its own devices is always good.

Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.

Let’s talk for a moment about why the age of Reagan should be over.

First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the “magic of the marketplace” were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.

To be sure, the wealthy benefited enormously: the real incomes of the top .01 percent of Americans rose sevenfold between 1980 and 2007. But the real income of the median family rose only 22 percent, less than a third its growth over the previous 27 years.

Moreover, most of whatever gains ordinary Americans achieved came during the Clinton years. President George W. Bush, who had the distinction of being the first Reaganite president to also have a fully Republican Congress, also had the distinction of presiding over the first administration since Herbert Hoover in which the typical family failed to see any significant income gains.

And then there’s the small matter of the worst recession since the 1930s.

What Krugman omits is an explanation of why we need government. After all, Japan and Europe have heavy government intervention in their economies, and very few of those countries have done better than us over the past three decades. Globalization has been hard on middle classes everywhere.

The case for government involvement in the economy comes from two things - 1) the theory of public goods, and 2) the success of the Clinton years.

Public goods theory is something I've mentioned a lot. It's been around since Adam Smith, but many people still don't seem to believe that there are some economic activities that only the government can (or will) do. Now, most people instinctively understand this fact - they have no desire to privatize the police, prisons, or the army (though some conservatives have recently tried to do just that). But when it comes to things like infrastructure, R&D, and education, conservatives have managed to convince a majority of Americans that the private sector can and will provide these public goods better on its own. It can't and it won't. Our crumbling infrastructure and sub-standard education are two big reasons that we run such a huge trade deficit; we can't match the efficiency of countries like Germany and Korea.

The success of the Clinton years is the big real-world demonstration of the need for government. Clinton combined smart industrial policy (R&D, export promotion) with fiscal restraint, and we experienced rising incomes across the board. Of course, Clinton didn't tackle infrastructure or K-12 education (Newt Gingrich might have had something to do with that). If he had, we might be in much better shape now. But the point is, drowning the government in a bathtub is a far inferior strategy to making the government work properly. This is something Alexander Hamilton understood and Ronald Reagan did not.

I am not willing to attribute all of America's zombie anti-government ideas to tricks played by rich conservative lobbyists. A lot of it has to do with our diversity - regional, racial, and ideological. As economist Alberto Alesina has theorized, countries with a lot of diversity have very heterogeneous preferences - which makes it hard to get national-level support for public goods at the federal level. Which is why we'll forever be faling pray to zombie Reaganism - until we use mass transit to better unite our regions, and until intermarriage makes us ethnically indistinct.

Until that day, all we can do is to remind people that government, though sometimes the problem, is often the solution.