Sunday, March 22, 2009

Becker's law: government sucks

Nobel prize winner Gary Becker has made an interesting contribution to the Financial Times' 'Future of Capitalism' series here.

His argument is basically as follows: OK, the financial crisis is serious, but even if we accept that free market capitalism is a cause of the crisis and subsequent recession, the gains from free market reforms over the past 30 years leave us still better off than we would have been. Moreover, we should beware of stimulus plans and regulatory responses that will threaten these gains. The basic principle should be 'first do no harm': for Becker, government interventions will tend to do more harm than good.

The main problem with this argument is that it implies that global economic performance has been better since the dawn of the new liberal, globalizing age under Reagan and Thatcher, than in the post-war era of Keynesianism, Bretton Woods and government interventionism. A quick look at the data suggests otherwise. The OECD provides some historical data for world GDP here:

Dividing the post war period into two 1950-73, and 1973-98, we see that:

World GDP increased threefold (201%) in the first period, and slightly more than doubled in the second (growth of 110%).

Broken down by region:
US GDP grew 142% in the first period, 109% in the second.
Western Europe grew 195% in the first, 68% in the second
Asia (excluding Japan) 219% and 277%
Africa 171% and 96%
Latin America 229% and 110%.
The former Soviet bloc more than doubled in the first period, and suffered negative growth in the second.

Now these are crude numbers (1973 is the start of the oil crisis, so creates a bias for the first period over the second; the neoliberal age is truncated at 1998), but at the very least they suggest that not everything changed for the better in the last 30 years. In fact, not much really changed between the 'Keynesian' and the 'neoliberal' eras, as can also be seen by this chart published by Jayati Ghosh here:

Claims for the success of neoliberalism essentially rest on the US growing faster than Europe since the 1970s, and the rapid emergence of China and India. The US is more 'liberal' than Europe; China and India have both adopted liberalizing measures. But so have Latin America and Eastern Europe/Russia, with unimpressive results.
In short, this hardly seems a basis for arguing that government activism always makes things worse. But Becker doesn't need evidence for such a conclusion: it's enough to know that governments consist of self-interested rational individuals who have no incentive to do anything for the benefit of society. QED.