The Value of Government

My dear brother-in-law has inspired me to elaborate on the efficacy of government.

When I read Milton and Rose Friedman’s “Free to Choose” sometime in the eighties, I became convinced that free markets have an important function for society in that they evolve efficient and innovative products and services; better products and services get selected by buyers who are trying to maximize their own benefit and sellers who are motivated to maximize their economic gain.  Over time new and more efficient products and services evolve. Societies which have adopted free market principles have seen considerable improvements in their economic wellbeing.

There are, however, externalities—the costs to third parties of transactions. While the transaction may be mutually beneficial to buyer and seller, others may be harmed by the transaction. For example, a power plant may produce electricity and sell it to satisfied consumers, but may emit mercury that harms those living near the plant.

But that is another story. Here, I want to enumerate things that government does that free markets have typically not done (though there have been innovations such as cap and trade that have improved ways that markets can solve problems that were traditionally thought to require governments “heavy hand.”)

Here is a place to start that might surprise you—the redistribution of wealth. Wilkinson and Pickett’s recent book, The Spirit Level, documents the relationship between economic inequality and human wellbeing. I detailed this in an earlier post. In both international comparisons and studies of the 50 American states, greater economic inequality is significantly and substantially related to higher rates of health and social problems.  The findings stand up using a variety of measures of inequality and health and social problems, including  life expectancy, level of trust, mental illness, obesity, children’s educational performance, teenage births, homicides, imprisonment rates, and social mobility.

Developed countries vary in economic inequality quite substantially, with Japan and Scandinavian countries being the most equal (the richest 20% earn about four times the bottom 20%), while the U.S. and Singapore are at the other end.  In the U.S. the top 20% earn 9 times what the bottom 20% earn.  Wilkinson and Pickett present a graph of the relationship between inequality and their index of wellbeing. The countries are tightly clustered around the regression line, with more unequal countries having much higher levels of these problems; the U.S. has the highest score on health and social problems.

The Scandinavian countries achieve greater equality through taxation.  Japan does not.  It has a culture that never evolved toward great inequality even as its corporations became very successful internationally. So government tax policies are not the only way to get to greater economic equality, but such redistribution does appear to be one way.

Wilkinson and Pickett present considerable evidence that the underlying mechanism involved in this relationship is the stress produced by living in an unequal society.  Sapolsky’s entertaining book on stress gives the details of how chronic arousal produced by unpleasant interactions, the threats associated with loss of one’s material goods, and unfavorable social comparisons contribute to heart disease, depression, and many other problems.  Simply knowing that you don’t have as much as another person seems to be stressful and in more unequal societies, there are many more opportunities to be stressed.

But there is more.  Even the wealthiest people in a society are worse off if the society is unequal. For example, among working age males, life expectancy is lower for the wealthiest slice of people in unequal England and Wales than it is in more equal Sweden.

Then of course there are all the things that tend to not get mentioned when the efficacy of government is discussed.  Fire protection, police, road building, bridges, etc.  Some may argue that even these functions should be privatized.  And there has been a movement to privatize some of them, in particular education. Thus, far the empirical evidence does not show that privatizing schools produces superior results, though, as we say in my business, more research is needed.

One reason that practice may not measure up to theory is that, while a market place is an arena that selects efficient products and services, the actors within that arena are simply trying to maximize their gains.  They can do that by lobbying government to pay them handsomely for whatever they can get government to fund. And so we see KBR winning no bid contracts and electrocuting soldiers through shoddy wiring. Government is not inherently more corrupt or inefficient. It is always a matter of the contingencies you set up.

But I am particularly concerned about the role that government can play in ending the cycles of poverty that so many American’s are mired in.   Despite one of the most free market economies in the world, we have not reduced the proportion of citizens living in poverty (other than those over 65, who, thanks to social security and Medicare, are no longer the poorest age group in society.)

(And speaking of Medicare, its administrative costs are way below those of private insurance companies. This is an example of where the market does not outperform government. Health insurance companies have to have profits and pay more to executives.)

Children who are raised in poverty have much poorer outcomes–health, learning, behavior problems, and psychological problems.  For example, poor families and families that experience economic reversals have more conflict which directly contributes to their children engaging in drug use and failing academically. And, reducing poverty reduces family stress and improves outcomes for young people. For example, Jane Costello and her colleagues at Duke University found that psychological and behavioral problems declined among Native Americans after their tribe opened a casino that significantly increased families’ incomes.

The Institute of Medicine Report on prevention documents evidence-based preventive interventions for every phase of development–from the prenatal period through adolescence–that can prevent multiple problems.  Here is a list of examples (asterisks indicate that the programs that have been shown to save more than they cost):

  • *The Nurse Family Partnership. Nurses contact at-risk pregnant mothers and work with them through the pregnancy and the child’s first two years of life. In three randomized trials done over 25 years, the program has been shown to significantly reduce mothers’ welfare dependency, increase the time to her second pregnancy, reduce child abuse, and even reduce the child’s likelihood of arrest in adolescence.
  • The Family Check-up for parents of young children. This program has been provided through the Women, Infants, and Children’s program (a federally funded program that also has clear benefits for at-risk parents). In three brief contacts with parents, the check-up reinforces the parents’ strengths and gives them additional advice on parenting. It improves children’s social and cognitive competence—two factors that are essential to further successful development.
  • *High Quality Preschool Education.  High quality preschool prevents the development of the entire range of psychological, behavioral, and academic problems. James Heckman, the Nobel Laureate in economics, has concluded that investing in early childhood education has the best return on investment of any preventive interventions.
  • *Behavioral Parenting Skills Training for children and adolescence. There are numerous interventions that improve parenting and prevent antisocial behavior, drug use, and academic failure.  There are more than fifty randomized trials of the efficacy of these interventions.
  • *Multidimensional Treatment Foster Care takes young children in foster care or adjudicated delinquents and provides them intensive support and training to the foster parents. The program reduces recidivism among adolescents and significantly improves young children’s functioning.

The one problem with the cost-benefit analyses is that the costs are incurred by government, but many of the benefits go to others—those whose houses weren’t broken into, the health care system that didn’t need to treat people for drug addiction, alcoholism, cardiovascular disease, or cancer.  A society that chooses to reduce its psychological, behavioral, and health problems will incur greater governments cost for a long time to come.

When Milton and Rose Friedman wrote their book, much of what they said was theoretical. In theory, free markets would lead to economic growth and greater wellbeing because they would motivate those in the market to provide increasingly better products and services. Events since then have proven their theory to be remarkably prescient.   Some of the examples of the success of free markets, include the collapse of communism, as country after country embraced free markets, the economic development in these countries that followed their switch to capitalism, and the technological development of the past century.

But that is not the same as saying that free markets and limited government are going to produce the best outcome in every case. That is an empirical matter and the evidence provided above points to a number of ways in which government activities benefit people more than sole reliance on the free market.

The implicit assumption in discussions of these issues is that a given economic and political system should be preferred because it improves human wellbeing. Certainly Milton and Rose Friedman were arguing for free markets, not because they would benefit a small proportion of the populace, but because they would benefit all to a greater extent than systems that depended on governmental control.

As support for a free market approach to policy grew in the U.S. over the past thirty years, I think we have not always heeded the evidence and have lost sight of our ultimate goal.  Yes, deregulation and reductions in government programs contributed to economic growth in this country.  But unquestioning belief in small government and little regulation have also produced policies that are harming many people.  I include under this heading the very substantial increase in economic inequality in the U.S. and the corruption involved in business such as KBR fighting regulation, while making vast sums of money from government contracts that received little oversight.

Ultimately we have a choice. Should the ultimate goal of social policy be to increase the wellbeing of all of the members of a society?  If this is your goal, then you need to evaluate each policy in terms of its contribution to this goal. Above I point to evidence that an economic system that allows great disparities in wealth harms many people. This implies to me that we should be pursuing policies to rectify these disparities.

This is not to say that we should abandon accountability. The evidence-based programs and policies that I advocate are likely to improve human wellbeing.  But when government (or the private sector) implement them, there must be monitoring to ensure that they are being implemented carefully and that they are achieving the outcomes that they are expected to produce.

One last thought. The National Institutes of Health has funded the vast majority of medical and public health related research in the world for the past forty years.  I could tell you many problems with the system. Yet it has unquestionably contributed to human wellbeing.

So let me amend my last post.  Taxes, Yes!  Accountability Too!

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