America Has “Big” Problems

The recent election of Scott Brown is just one more opportunity to ruminate over the excessive size of the US government.  In earlier posts I have argued that there are big diseconomies of scale in governance.  Small countries like Singapore, Denmark and Switzerland seem to be more effectively governed that bigger countries like Germany, Britain and Italy.  Why is that?  I am not really sure, but I’d guess it is partly related to the principal/agent problem.

The US appears to be an exception, but I think we are coasting on our past (decentralized) success.  I wonder how much longer we can maintain our position near the top of the global PPP income rankings.  Today the Heritage Index of Economic Freedom came out, and we continued to slip, down to number 8.  All of the countries ahead of US are small, not just relative to the US, but relative to the UK and Italy.  It’s also interesting to note that all but one were colonies of Britain when Britain was one of the most democratic countries in the world.  The only exception is Switzerland, which is currently the most democratic country in the world.

Right behind us is Denmark.  When you consider that Heritage views taxes and size of government as big negatives in their rankings, what does Denmark’s near-tie with the US tell you about how effectively our “small government” is currently governing.

Just yesterday I thought of one piece of evidence for the inefficiency of big countries.  I was reading an article about how Poland’s new income tax is a model of simplicity compared to the US.  Just two rates (18% and 32%) and far few loopholes.  I don’t know the details, but something tells me that Poland does not require taxpayers to practice their high school math by calculating numerous “worksheets” that have no discernible purpose.

[As an aside, I have to think that the average taxpayer believes the government “must have some good reason” for these worksheets.  If they knew, as I know, that the only purpose is to give work to tax accountants, that they serve no purpose, there would be a revolution.  And please don’t insult my intelligence by telling me that these worksheets add progressivity to the tax system.  An identical degree of progressivity can be achieved by eliminating all the worksheets (and the AMT for that matter) and then fiddling with the tax rates.]

Then I started to think about our system.  I have argued that if we were to adopt the European model then all activities done by our Federal government would be downloaded onto the states.  And I recalled that my state tax form is dramatically simpler than the Federal form.  I spend at least 5 times as much effort on the federal form as the state form.  Now you might argue that the federal form must be more complex, because they raise much more revenue.  But it is just the opposite.  Peter Lindert is one of the most intelligent defenders of the welfare state.  And he argues that the higher the tax level, the more important it is that the tax system be very efficient.

For the most part our Federal government does completely different things from the state governments.  The federal government does national defense, space exploration, Social Security, etc.  States do police, fire and schools.  So it’s hard to compare efficiency.  But both do income taxes, and the state income taxes are far more efficient than the federal income tax, just as the income taxes of small countries like Estonia and Iceland are models of simplicity.  (Oops, maybe not a good time to argue for the small country model.  Oh well, you have to take the long view.)

Back to Scott Brown.  This country does not have any sort of consensus as to what sort of health care system it wants.  Libertarians want less government, liberals want more, and the health industrial complex wants expensive health care.  Americans say they are happy with their health insurance, but only because they have no idea how much they are paying for it.

Because we can’t agree, we end up with a federal tax system and a health care system that are like a giant Rube Goldberg devices.  It’s even worse when the two systems interact.  There is a provision in the tax code that lets you prepay “medical expenses” in before-tax dollars.  But you first must decide at the beginning of the year how many health emergencies you are going to have, and then set aside the money to pay for those health emergencies.  What?  You say you don’t know how many heart attacks you are going to have next year?  Come on, you need to start planning your life more carefully.  Of course in reality people don’t use these expenses for health care, because if you set aside money and don’t use it then you lose the money.  And some people fear they might fail to get sick.  So I use $720 of the money for purely cosmetic purposes, to buy disposable contact lens.  By the way, I appreciate your support; you guys are picking up 40% of the bill.  Even worse, the seller understands the system so rather than giving you a simple price cut, they force you to fill out complicated forms to get a $30 dollar rebate.  This means the taxpayers are actually picking up more than 40% of the net cost.

Sometimes I wish I lived in a small country like Australia or New Zealand (3 and 4 on the Heritage list.)  I am sure they have lots of problems, but surely their tax/health care system can’t be as maddening as ours.

PS.  I don’t know if you guys are interested in the Scott Brown race, but perhaps I should say something about our strange politics in Massachusetts.  Unlike southern states, in Massachusetts the richest towns tend to vote for liberals.  Coakley won Boston (which is a mix or rich and poor) and nearby towns like Cambridge and Brookline by huge margins.  She also won most of the affluent suburbs to the west, even including posh Wellesley, home of Greg Mankiw.  She won affluent Newton (where I live) by 2 to 1.  OK, so Coakley won huge victories in the most urban areas, and also won in the affluent suburbs to the west of Boston.  Then given that metro Boston is 75% of the state, how in the world did a Republican win by 5%.  Not by winning the far west of the state, all those towns also went for Coakley.  The plot thickens.  There are two answers.  Brown won the middle class suburbs north and south of Boston, and also the exurbs further out.  The margins were often large, and the turnout was much higher than in Boston.  And most importantly, he fought Coakley to a near draw in many of the gritty blue collar towns where a Democrat should have a large advantage.  Places like Revere and Worchester are normally Democratic, but have some populist anti-tax instincts.  A number of them voted to completely repeal the state income tax in a referendum held about 10 years ago, even though the proposal was viewed as so wacky that even the Republican Party opposed it.  It came surprisingly close to passing.

Here is a map of the state and vote totals by town, for you political junkies.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

1 Comment on America Has “Big” Problems

  1. You are right on the money !!

    Federal government is way too big.

    Taxes are whacked and complicated.

    and about healthcare, the biggest problem is exactly what you said … “Americans say they are happy with their health insurance, but only because they have no idea how much they are paying for it.”

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