By Simon Johnson
Perhaps the biggest issue of this presidential election is the relationship between government and private business. President Obama recently offended some people by appearing to imply that private entrepreneurs did not build their companies without the help of others (although there is some debate about what he was really saying).
Mitt Romney’s choice of Paul D. Ryan as vice presidential running mate is widely interpreted as signaling the further rise of the Tea Party movement within the Republican Party – with the implication that the private sector may soon be pushing back even more against the role of government.
For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of the United States, something it got right while other nations failed to do so, in various ways.
Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce?
To think about these issues, I suggest starting with “Why Nations Fail” by Daron Acemoglu and James Robinson, a sweeping treatise on political power and economic history. (I have worked with the authors on related issues, but I wasn’t involved in writing the book. I am using their material as a reference point throughout my new course this fall at the Massachusetts Institute of Technology, “Global Controversies.”)
Income per capita in 1750 was relatively similar around the world. There were some pockets of prosperity – imperial capitals and trading cities – but most people lived at roughly the same level of income (and lived about the same length of time). That changed dramatically in the hundred years after 1800; some countries charged ahead in terms of industrialization and broader economic development, while others lagged. (Lant Pritchett memorably labeled this phenomenon “Divergence, Big Time.”) Since 1900, while average income levels have risen almost everywhere, there has been surprisingly little convergence in income per capita. Countries that were relatively rich in 1900 are, for the most part, relatively rich today. Most countries that were poor in 1900 have failed to catch up with the highest income levels today – with some notable exceptions in East Asia and for some countries with a great deal of oil.
In the Acemoglu-Robinson view, it was all about having a favorable head start – based on strong and fair rules of the game:
“Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.”
These were excellent conditions for innovation and private-sector investment. People who were not born wealthy were able to educate themselves and create their own enterprises. But the government also played a very helpful role, with investments in clean water and public health, developing public education and supporting the creation of transportation and communication networks.
Equality before the law also became an essential component of successful societies – for example, much more present in the United States than in Mexico.
At least in the 19th century, government cooperated closely with private business in the United States. In much of the world, this relationship has never worked well – and conditions for growth are consequently undermined. “Why Nations Fail” explores in great detail exactly when and why politicians choke business, how economic oligarchs capture and abuse political power and what happens when militaries become too powerful. It is sobering reading.
“Why Nations Fail” has been very successful, in part because the history appeals to people on both the right and the left of the political spectrum. To those on the right, economic development requires strong property rights. To those on the left, constraints on the power of elites are essential. Both views garner a great deal of support from the Acemoglu-Robinson view of how the United States, Western Europe and a few other places did so well.
The United States avoided the problems on which the book focuses, but nevertheless it now faces a major struggle regarding the nature of its society — and its future.
The 20th century brought a new and expanded role for government, putting into effect regulations that constrained what private business could do (starting with antitrust laws and food purity rules), providing various forms of social insurance (including old-age pensions) and increasing marginal tax rates (particularly on income). The modern federal government also operates a global military presence on a scale unimaginable to any American before 1941.
Unlike the populations of some countries, the American people have never reached a consensus over what was achieved and what was given up in the 1930s. In the United States, the rising role of the state produced a long-term backlash, culminating most recently in the form of a tax revolt (from the 1960s), a move to the right in the Republican Party (beginning with Ronald Reagan and running through Newt Gingrich directly to Mr. Ryan) and a deep-seated conviction that tax rates and government spending must be reduced (“starve the beast”).
The discussion of Mr. Ryan and his budget ideas is likely to become central to the election over the next two months – and this is entirely appropriate.
A powerful coalition has risen against the state. It sees modern government as abusive and as standing in the way of economic recovery and growth. There is a strong urge to undo the reforms of the 1930s and roll back government at all levels. The economist Arthur Laffer spoke for many others when he said, “Government spending doesn’t create jobs, it destroys jobs.”
In truth, we all built the modern American economy. This certainly includes individuals taking responsibility for themselves, becoming more educated and working hard to develop their own companies. But the government also played a constructive role.
Can our political system reach a reasonable agreement on how to divide the benefits and share the costs? In “White House Burning,” James Kwak and I proposed one way to do this – phasing in a fiscal adjustment based on the principle that revenue should return to where it was before the Bush tax cuts. Mr. Ryan is proposing a very different vision: phasing out the nonmilitary part of federal government.
In my assessment last month, I found that anything close to Mr. Ryan’s version would be too extreme.
Mr. Ryan wants to strengthen the private sector and get government out of the way. In my reading of Professors Acemoglu and Robinson, Mr. Ryan’s fiscal intentions would destroy the positive role of government in modern America — throwing the baby out with the bath water. This would not be good for continued private-sector development, on which we all depend.
This blog post appeared last week on the NYT.com’s Economix site; it is used here with permission. If you would like to reproduce the entire column, please contact the New York Times.