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Published by EH.NET (October 2000)
Vito Tanzi and Ludger Schuknecht, _Public Spending in the 20th
Century: A Global Perspective_. Cambridge and New York: Cambridge
University Press, 2000. xvi + 291. 4.95 (cloth), ISBN:
0-521-66291-5; 2.95 (paperback), ISBN: 0-521-66410-1.
Reviewed for EH.NET by Roger Middleton, Reader in the History of
Political Economy, University of Bristol, UK.
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This is an ambitious work which can be approached from two
standpoints: of one that revisits Colin Clark's (1945) much-cited
hypothesis that there is some critical level of public expenditure
beyond which diminishing returns prevail; and of the other as a
contribution to the current global debate on economic policy which is
now dominated by the question of which model of capitalism works
best. In one sense few economists are better qualified to undertake
this study than these authors. Tanzi is the Director of the IMF's
Fiscal Affairs Department and Schuknecht the Principal Economist in
the European Central Bank's Fiscal Policies Division. Both have made
significant contributions to the applied fiscal policy literature and
to the political economy of state reform. But this book has ambitions
to be more than a study of the current policy debate; it purports to
be a historical survey of the growth of government since c.1870. Both
seem to be economists, however, largely innocent of the ways of
economic historians and of the economic history literature - also
that of comparative public policy - and this has quite significant
ramifications for the conduct of their study and the interpretation
of the evidence. The problems raised are various. They range from
extraordinary statements, such as a reference to Keynes (1926) as 'a
little known book' (p. 4), through gross stereotypes of episodes in
the history of economic thought and policy regimes, and onward to
ignorance of so much of the literature on both government growth and
the interpretation of long-run economic growth (of which more later).
There is also a populist tone to much of this book which will grate
with some readers, and not just those on the political left who will
in any case be unconvinced by the 'Washington consensus' message.
But, enough of this for the present and instead let us progress to
the structure and organisation of this study, and of its conclusions,
for there is much here that is very valuable. The basic thesis is
established early: that the growth of public expenditure since c.1870
was not caused by inevitable forces that made it imperative; that in
terms of the standard socio-economic indicators (taken as proxies for
government policy objectives) smaller, better focused government is
better able to deliver than is big government; and, therefore, there
exists significant scope currently for the big spending OECD states
to contract their public sectors. Moreover, they argue, such fiscal
consolidation can be attained without incurring major economic or
political penalties. This thesis is pursued through four parts to the
book: I, 'The growth of government: a historical perspective'
(chapters 1-3); II, 'Gains from the growth of public expenditure'
(chapters 4-6); III, 'The role of the state and government reform'
(chapters 7-9); and IV, 'Recent experiences of countries in reforming
the government' (chapters 10-12). The first two parts rely heavily on
two long-term cross-country datasets for the OECD states: one on
comparative public finance (where, despite the book's title, revenue
data is also included and analysed) and the other on socio-economic
indicators. These are provided for benchmark years (c.1870, 1913,
1937, 1960, 1980 and 1990s) and sub-periods (for growth rates) for as
many of the OECD states, and for as wide a range of social and
economic indicators, as can be amassed as far back towards c.1870 as
is possible. The underlying data is a useful resource in its own
right, but it is unfortunate that the authors know so little about
the public finance history of the individual states (including the
existence of data sources often more suited than those general
statistical collections they have used) and are unaware of important
comparative work by authors such as Gemmell (1993), Steinmo (1993) or
Castles (1998) which covers much of the ground they do but tells much
richer stories about the growth of big government.
Tanzi and Schuknecht's account of the rise of big government posits a
watershed around 1960. Until that point, and for the majority of
countries, the rise in public spending was matched by improved
economic and social welfare, whereas thereafter diminishing returns
became established. They find the rapid growth between 1960-80
remarkable, given that it occurred when most countries were not
engaged in war effort, there was no depression and the demographic
developments were generally fiscally friendly. Their explanation is
in terms of changed attitudes towards the role of the state - 'the
heyday of Keynesianism and the time when governments were perceived
by many to be efficient in allocating and redistributing resources
and in stabilizing the economy' (p. 16). My problem with such
arguments is that they attempt to provide overarching explanations
for discrete blocks of time. An economic historian would not work
with 1960-80, would want to factor OPEC into the argument, would
raise doubts about the hegemony of Keynesianism in all OECD
countries, and would in any case retort that Keynesianism was in
crisis during the period of its supposed heyday and that fiscal
retrenchment began well before 1980 in some countries (Britain being
a notable case).
I have problems also with the next stage, which involves dividing the
OECD into three groups on the basis of their 1990 status as having
big, medium or small public expenditure/GDP shares. The big spenders
(shares of more than 50 per cent) thus comprise Belgium, Italy, the
Netherlands, Norway and Sweden; the medium (40-50 per cent) Austria,
Canada, France, Germany, Ireland, New Zealand and Spain; and the
small (less than 40 per cent) Australia, Japan, Switzerland, UK and
the US. If the purpose of the exercise is to show that between
1960-90 socio-economic welfare advanced more relatively in the small
spending group, then it matters intensely when and how we measure
small. For example, anyone who knows anything about the political and
economic history of postwar Britain will have reservations about the
inclusion of the UK in the small group, knowing full well that its
ranking in the OECD in 1960 was very different. Is a single
observation, therefore, the appropriate way to proceed? We have also
the problem that the small group is dominated by the US, and indeed
this creates serious problems for the authors when it comes to the
social stability indicators where in terms of the propensity to
imprison the population and the divorce rate the US is quite out of
line with the rest of the OECD.
There is also a problem of conflation in the argument that the small
group have enjoyed the greatest relative gains in economic welfare
since 1960 because they have not been afflicted by big government. As
is well-known amongst economic historians, comparative growth rates
need in the first instance to be located within a long-term catch-up
and convergence framework to accommodate the differing potential that
individual economies have to grow more rapidly than average to attain
the GDP/worker-hour levels of the productivity leader(s). There is no
mention of this, and many will in any case be unconvinced by what is
described as the 'new, modest, and understandably controversial
approach' (p. 74) of inferring changes in socio-economic welfare at
the level of the nation state directly from improvements in the
values of the relevant socio-economic indicators. It is important to
record that there is no formal hypothesis testing here, no
econometrics of any sort, and this methodology is quite incapable of
distinguishing causation from association. For example, they argue
that 'countries with a large share of public provision and financing
of health care, such as the United Kingdom, do not show better
indicators than countries with a relatively smaller role for
government in health, such as Switzerland. It is therefore
questionable as to how far growing public expenditure is still
contributing to these improvements. Progress in health indicators
seems to be more correlated with technical progress and access to
health care does not seem to differ much between countries any more'
(pp. 91-2). What is not mentioned is the well-established
relationship between health and income (and its distribution) - as
their Table IV.2 (p. 79) shows GDP/capita was very nearly twice as
high in Switzerland as in the UK in 1990 and 2.14 times as high in
1960.
The book is on more solid ground, and makes more of a contribution,
in two areas. It provides a convincing account of how in practice the
redistributive effects of the interaction of welfare spending and tax
regimes produce little differences between the big and small spenders
because when the total tax burden becomes a large share of a
country's GDP, it is no longer very progressive and, equally, when
public transfers become very large, they tend to be poorly targeted.
Secondly, parts III and IV of the book provide a useful summary of
the Washington consensus on what the role of the state ought to be
and a blueprint for its achievement. It is thus likely to be widely
read in policy circles, but those who want more nuanced accounts of
what occurred in public spending will have to look elsewhere.
Roger Middleton's recent books include _Charlatans or Saviours?:
Economists and the British Economy from Marshall to Meade_ (1998),
_The British Economy since 1945: Engaging with the Debate_ (2000) and
(edited with Roger Backhouse) _Exemplary Economists: Introducing
Twentieth-century Economists_ (2 volumes, 2000).
References:
Castles, F.G. (1998) _Comparative Public Policy: Patterns of Post-war
Transformation_. Cheltenham: Edward Elgar.
Clark, C.G. (1945) "Public Finance and Changes in the Value of
Money," _Economic Journal_, 55 (4), pp. 371-89.
Gemmell, N. (editor) (1993) _The Growth of the Public Sector:
Theories and International Evidence_. Aldershot: Edward Elgar.
Keynes, J.M. (1926) _The End of Laissez-faire_. London: Hogarth
Press. Reprinted in _The Collected Writings of John Maynard Keynes_.
Vol. IX: _Essays in Persuasion_. London: Macmillan (1972), pp. 272-94.
Steinmo, S. (1993) _Taxation and Democracy: Swedish, British and
American Approaches to Financing the Modern State_. New Haven: Yale
University Press.
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Fax: 513-529-3308). Published by EH.Net (October 2000). All EH.Net
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