----------------- HES POSTING ----------------- 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. <[log in to unmask]> 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. Copyright (c) 2000 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ([log in to unmask]; Telephone: 513-529-2850; Fax: 513-529-3308). Published by EH.Net (October 2000). All EH.Net reviews are archived at http://www.eh.net/BookReview ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]