Who Built That?

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.

25 thoughts on “Who Built That?

  1. Perhaps we need to be concentrating more on the technology of man, and not so much on his wants. Sure you piped water and all those things, but the education of breathing through the nose and disinfecting the mouth, along a couple other even more complex issues has been left behind in the dust. But no, lets watch the politicians try to grow us to the moon, when all we really need to be able to do is maintain what we have, which is more than they are able to do. Okay, so yesterdays generations built the sidewalks that today’s generation walk on, but who devised the alphabet and are they watching you, is the more intriguing question.

  2. I would personally like to see Republicans defend markets more, and business less. Proper functioning markets are what create wealth and jobs, as well as increased opportunity. Rarely do I ever see Republicans take this line of defense. Instead they just pay lip service to the firm itself, utterly disregarding the forces that created it.

  3. @Shaun: transparent, diverse, undistorted, wisely regulated markets filled with a myriad of smaller citizen-actors focused on long-term success meeting actual needs, yes. Markets whose participants understand that markets are an economic mechanism of society, not that society is a handmaiden to its markets.

  4. Business owners have three common complaints about government regulation:

    1) no one knows exactly what the regulations mean, different regulators offer different interpretations

    2) government regulators have no common sense because many have never done “real work”

    3) government does not understand the costs of compliance, especially reams of paperwork

  5. A somewhat related work is worth mentioning as relevant, which is Paul Kennedy’s 1987 book, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. Even though it was written 25 years ago, it still seems relevant.

    Have you considered posting on the subject of all the industrial policy employed in the US during its rise to power? The machine tool industry, the internet highway system, ARPAnet/internet, NIH, NSF, NASA, come to mind. Most of these were public/private partnerships.

  6. Right now, at this moment, if a bank lends to the US Government so that a bureaucrat can relend that money to a Solyndra it can do so against considerably less bank capital than if it was the banker who lent the money to a Solyndra… and Baseline Scenario has seemingly no problem with that. I do!

    Also, capital, requirements based on perceived risk introduce in the system an increased risk-adverseness which can have considerable negative implications for our nations, especially if we remember Mark Twain´s banker, he who lends you the umbrella when the sun shines and wants it back when it rains.

    Development needs risk-taking, and I hope at least one university, starts to think about creating a School dedicated to the role of risk-taking in human development.

  7. @Per – how about when bankers lent to companies like Bain? You got a problem with what happened there?

    cut and pasted from the article:

    “…Instead of cars and airplanes, we built swaps, CDOs and other toxic financial products. Instead of building new companies from the ground up, we took out massive bank loans and used them to acquire existing firms, liquidating every asset in sight and leaving the target companies holding the note. The new borrow-and-conquer economy was morally sanctified by an almost religious faith in the grossly euphemistic concept of “creative destruction,” and amounted to a total abdication of collective responsibility by America’s rich, whose new thing was making assloads of money in ever-shorter campaigns of economic conquest, sending the proceeds offshore, and shrugging as the great towns and factories their parents and grandparents built were shuttered and boarded up, crushed by a true prairie fire of debt….”

    Read more: http://www.rollingstone.com/politics/news/greed-and-debt-the-true-story-of-mitt-romney-and-bain-capital-20120829#ixzz267nfrW4O

  8. Any perusal of history proves that successful governments and societies provide incentives and largess to industries that in the longterm benefit those governments and societies. The early days of the American experiment the fledgeling government “assisted” industries in the development of canals, later railroads, highways, energy suppliers, commercial airlines, the auto industry, et al. All of these industries assumed huge risks with the willing help of the government to produce systems and industries that had significant positive impact on the larger society by opening up new avenues of commerce that benefitted EVERYONE! Sure select oligarchs grew unnaturally powerful and there were many abuses, but the long term gains for EVERYONE society far outweighed the negatives. The big, huge, massive difference between the risktaking is these kinds of industries and the perverse risktaking of the den of vipers and thieves in the finance oligarchs is the difference between hard physical usable assets, and the intangible unusable mythical figures and digits manically conjured into assets by the den of vipers and thieves in the finance oligarchs. It’s the difference between real assets, and fictional Ponzi schemes. Risk taking in the finance sector must be forcefully regulated to prevent and prohibit the kind of toxic assets and perverse incentives the finance oligarchs employ that may benefit select oligarchs and predatorclass individuals, but cause disastrous harm and injury to everyone else.

    The issue of government regulation is nuanced and complex. There are many shades of grey where less stringent or confusing regulation would benefit small business taking big risks. But large business and particularly predatorclass socalled TBTF oligarchs must be forcefully regulated. These fiends create NOTHING but paper and digits and gargantuan imaginary profits for the predatorclass and predatorclass oligarchs exclusively.
    “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.”

    Count me in the overthrow the elites school!

  9. I don’t mind a government lending to a Solyndra (though hopefully to a better Solyndra), and I do not mind banks lending to a Bain.

    What I do mind is for the government to dictate that the conditions for banks when lending to the government and other “not risky”, should be much easier than for banks lending to the “risky”…

    because that translates directly into a huge subsidy to the government and other “not-risky” (which by the way could include Bain) and a tax on the “risky” like small businesses, entrepreneurs or even ordinary citizens…

    and those bank regulations are important drivers of increases in inequality, as the “not-risky” correlate strongly to the haves, and the “risky” to the not haves.

    If the US Congress could understand what taxing power these bank regulators have and are exercising behind their back, many of its members would be extremely upset.

    And by the way, with respect to Bain and similar, much or even all what they do and that might seem unpleasant, is to advance in time what would only happen without a Bain and similar… though I know that many like to believe in a pretty vulture free world without rotting carcasses.

    Creative destruction is about letting the vultures lose before the carcasses start smelling, though of course, sometimes they start too early, and actually kill.

  10. I live on Cape Cod, MA. Its a relatively small spit of sand that sticks out into the Western Atlantic off of Southeastern Massachusetts. During the last century, the seal population has been allowed to recover from a prior period when it was almost decimated. The population has somewhat recovered now, and now the white sharks are back (its pretty much a safe bet they were present prior to the near decimation of the seal population). The debate among locals often takes a curious form – kill the sharks, or, kill the seals. Management of the seal population might be possible, but management of the white shark population is less likely. Who’s gonna get to be culled, at least at this point seems arbitrary.

    Growth. Wonderful stuff isn’t it? For Life, of which we are very much a part of, ‘to stop growing’ basically means ‘to start dying’. With respect to Life, sustainability simply won’t do, it goes against a few billion years of evolution.

    Prof. Johnson, how does the notion of ‘limits to growth’, if it is even see it as an important topic, fit into programs in business administration and finance? Austerity? Especially, austerity without end? Austerity to what end? Short-term? Really? Why would it end? What exactly is being asked of these peoples (here, the Greeks)? Both in the short-term and in the long-term? And why would they be willing to accept it? Why would they be willing to be culled?

    I would like to suggest Sam Harris’ Free Will. All indications are that we are not what we think we are, and though Harris is more optimistic than me on this point, I’m also inclined to believe that its unlikely that we are capable of being what we would like to be, at least not without a lot of regulation.

    My money is on the seals population being culled… these guys just lounge around on the beach all day soaking up the rays, waving off the occasional fly, procreating and going for the occasional swim…. really, I mean like “get a job deadbeat”, the free ride is over.

    Oh yeah, one more thing, call me crazy, but if austerity is the solution, the powers-that-be might want to throw in some Fascism -i.e. the Europeans better start building up those internal security forces. Lucky for us on the Cape, seals can’t move very fast on land – heck you can just take them out with baseball bat… sharks on the other hand have those big teeth… best not to risk confrontation.

  11. Well said, I have been begging for at least one university creating a School on the role of risk-taking in economic and human development, but unfortunately, academicians are not prime examples of risk-takers… they prefer planning and risk-avoidance.

  12. @Per – Without a man to land ratio that clearly provides the mathematical certainty that PROFIT has a LIMIT, all other speculations are just that – speculation. There is no “risk” other than destroying life-sustainable systems through a process of rabid and delusional profit-taking.

    Romney evaded the draft and jail time like his buddy in crime got – Mr. Milken.

    Great greed is always followed by great violence. New predators always arise to eat the carcass.

  13. It’s not that austerity is the solution, its more like austerity is the consequence of past bad try’s at solutions. The theory behind it is that when in times of high energy prices, you conserve [as in the 70’s when some people began buying smaller cars to combat high gas prices]. And the best time to tax and recover past debts was during times of low energy prices [as occurred during the nasty housing boom of late, all though the deluded congress saw fit to do just the opposite with taxes this time]. Today’s politicians and upper class citizens are simply following up on past politicians bad fiscal and regulatory policy’s. Think of it as trying to rid the country of slaves during the Lincoln administration, [the slaves being today’s lower class people]. The congress was leaning toward the slaves as having been brought here illegally, as such they were ordered to be sent back, but Haiti was as far as they got before Lincoln choose emancipation for the remainder of the slaves.
    So for some reason the big financial bad boys had to sign away interest rate charges on borrowed money in the early 80’s here in America. And now the beneficiaries of that maneuver are coming round, and trumping the stage riding in on their green magic carpet to save the financial day, by saying they will grow the economy’s in the rest of the world to finance our debt here today. Now that’s great that other country’s are just now getting around to building their infrastructure at these times of high costs, while we built the majority of ours during times of low costs, but to also make the promise that we can now still continue to grow here at home to solve our debt problems is retarded at best.

    We need to use the congresses method of getting rid of the civil war slaves and declare that any interest loan over 10% since 1980 was an illegal maneuver and is here forth nullified and canceled, that’s the only logical conclusion solution to today’s debt situation.

  14. filbt,
    I’m aware of the theory, the problem is that it assumes infinite resources -i.e. recovery is always possible.

  15. Correctamondo, and they have plans to go to Mars and recover any needed future metals or materials, that’s after they have enslaved the whole world to their methods though, it takes a lot of money to accomplish a thing like that.

  16. http://www.thelittleblueblog.org/2012/07/30/the-public-obamas-and-romneys-opposed-visions-for-a-free-america/

    The Public: Obama’s and Romney’s Opposed Visions for a Free America
    By George Lakoff and Elisabeth Wehling On July 30, 2012

    “America is divided about its future. Should it keep and expand the system that brought past opportunity, prosperity and freedom? Or should it dismantle that system?”
    “This is a central issue, not a minor one. It underlies the political division in our country. Obama and the Democrats want to continue the public provisions upon which freedom and material success has been built in our nation. Romney and conservative Republicans want to dismantle the public, and would thereby end the freedoms, the opportunities, and the conditions for success that the public provides.”
    [This is a first rate discussion of the distinctions and directly on topic for this article and its comment stream:
    …it is a highly recommended read, save it, post it and pass it on aggressively to every thinking individual you can reach}:

  17. 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…”
    Is it really about business and government or is that the BIG LIE?
    Isn’t it obvious that the object of business is now to BECOME BIG GOVERNMENT?
    …Perhaps George Lakoff has hit the nail on the head. It is not so much about business and government as it is, and always has been…, about private interest (commercial, merchant, oligarchy and aristocracy all included in this version of the tragedy of the commons} and the authentic free public domain openly collectively subsidized shared democratic governance). Nowhere is Garret Hardin’s ‘Tragedy of the Commons” more relevant than the stakes and shares of freedoms in these commons!
    The Public: Obama’s and Romney’s Opposed Visions for a Free America
    By George Lakoff and Elisabeth Wehling On July 30, 2012
    President Obama recently reminded us that private life, private enterprise, and personal freedom depend on what the public provides.

    “The Internet didn’t get invented on its own. Government research created […]
    Continue Reading →

  18. As someone who speaks out for taxing all citizens with a very progressive rate on all income, including dividends and capital gains (but low or even zero corporate taxes) I cannot be accused as someone who believes that strong governments are not necessary.

    Yet I do not agree with the argument made in the article you link to, because it is based on the assumption that “The call for small government translates into neglectful government”.

    On the contrary, I am for small governments precisely because when these have to concentrate on their basic responsibilities, and cannot neglect these because they are busy doing other “vital” things, is what makes for a better and stronger government.

    Governments are better and stronger when held on a tight leash, having always to earn their right to take on new responsibilities by fulfilling their current, and their fiscal income. If not, they become unruly and bloated.

  19. Per Kurowski, love you brother and value your poignant posts – but your targeting the wrong enemy.

    “Governments are better and stronger when held on a tight leash, having always to earn their right to take on new responsibilities by fulfilling their current, and their fiscal income. If not, they become unruly and bloated.”.

    Wrong my brother!

    (Corporations and oligarchs) ..,are better and stronger when held on a tight leash, having always to earn their right to take on new responsibilities by fulfilling their current, and their fiscal income. If not, they become unruly and bloated.”

    The great evil that threatens the 99% is not biggovetnment, – but the unbridled power and control of ‘corporations and fascist oligarchs!!!

    These are the people enemy – NOT government!!!’. These are the den of vipers and thieves offshoring our jobs! These are the monsters crushing our wages and bargaining power for wanton profit of predatorclass thieves. It is corporations and oligarchs that are the people dire enemy, NOT the government pet se. Now there are ticklish issued because the socalled government in the current panjandrum is ownedanfcontrolled by the corps and fascist oligarchs, but the root problem stems from the corps and oligarchs, not the government !

  20. But of course corporations and oligarchs need also to be held on a tight leash, having also always to truly earn their income and, if not, they also become unruly and bloated.

    And precisely because of that is why I have protested the artificial regressive bank regulations that favor so much the access to bank credit to those corporations and oligarchs perceived as “not-risky”… These “not-risky” have not earned it as they anyhow pay lower interest and get bigger loans!

    This is not a question of corporations or government being our friends, and therefore having the right to treat us as it wishes… if we allow ourselves to be polarized that way, we’re doomed.

  21. Markets? In a sense, yes. But markets controlled by monster corporations with gross sales are the size of nations GDP. And those corporartions are controlled by a handful of men who are the board of directors. The investment choices in this market system are not democratially made. The decisions can affect the 7 billion people on earth now and billions to come. Take, for example, the oil industry whose policy is to get every dollar of oil out of the ground regardless of the consequences. Such power without responsibility is the issue.

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