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Government and Social Democracy is Good for Business
Finland, Sweden and Norway, all with high taxes and generous welfare systems, are considered by business executives among the 10 most competitive nations.
By Jeff Madrick
This article was in the January 20, 2005 edition of the New York Times when George W. Bush was pushing the idea of privatizing Social Security.
WHAT is the purpose of government in the American economy? To many people these days, it is axiomatic that less government is invariably better for the economy and the nation. In this way, tax cut after tax cut is justified despite a growing federal budget deficit. Such thinking also lies behind the efforts to privatize Social Security.
But it is hard to square this view that government is always an economic menace with the long history of capitalist development. Going back in time, every successful capitalist economy in the world has had an active partnership between government and business. Even when the United States government was small in the nineteenth century, it built the canals, subsidized the railroads, made private ownership of land accessible, and developed a widely envied public education system.
Consider how the role of government changed in America as the economy and society changed. The presidency of Thomas Jefferson is a good example. Jefferson is criticized today because he feared the encroachment of manufacturing on what he considered an American agricultural utopia. Jefferson fought against the establishment of American tariffs and promoted free trade, so farmers could easily sell their produce to Europe. He favored a small government and discouraged the public financing of internal improvements like roads.
It was Alexander Hamilton, the favorite founding father of business, who wanted to protect domestic manufacturing from foreign competition by imposing tariffs. Hamilton also wanted a powerful central federal government, which could sell its own bonds and build the roads the nation badly needed.
As the economy evolved, however, even Jefferson began to change his tune, accepting modest tariffs. More to the point, his followers became government activists. In the nation's early years, they began to support manufacturers and tariffs. In particular, the Jeffersonians in New York used government money to build the great public project of the day, the Erie Canal. Jeffersonians in other states followed suit.
The United States economy is still changing radically. Consider the last 30 years. The two-worker family is now the norm, largely because a single wage can no longer support a family. The quality of public education is highly unequal, depending more than ever on how upscale one's neighborhood is. Health care costs are rising much faster than typical family incomes. Computers and the Internet have become necessities not luxuries.
More use of the markets may help solve some of these problems. But judicious and imaginative use of government will also be necessary. Government, however, is being shut out as an alternative.
Consider an index of economic freedom published annually by the Heritage Foundation and The Wall Street Journal, which ranks more than 150 nations largely on the level of government interference in the economy. The lower the taxes, the lower the barriers to free trade and the smaller the government share of gross domestic product, for example, the higher the nation's ranking on the index. Limited social programs, of course, also improve the freedom quotient. The editors of the report contend that such economic freedom is the ''universal'' key to prosperity.
But compare those top 10 countries to the 10 most competitive countries on a list compiled by an international business group, the World Economic Forum. The forum's growth competitive index is based heavily on an opinion survey of business executives, as well as measures of technological sophistication and other factors.
Only 3 of the 10 most competitive nations are among the Heritage Foundation's index of the world's 10 freest nations. They are Singapore, Denmark, and Iceland. In fact, some countries like Finland, Sweden and Norway, all with high taxes and generous welfare systems, are considered by business executives among the 10 most competitive nations. Why? Because they use their government spending to improve education, for example.
Indeed, Norway, which has the second highest gross domestic product per capita in the world, ranks 29 on the index of economically free nations. The Chinese economic miracle has occurred even though China ranks 112 on the index of economically free nations.
Such attitudes that less government is invariably better have restricted this nation's vision, compared with the bold efforts of the past. Education is a good example. It has become as difficult to live a middle-class life today without a college degree as it was to lead a decent life without a high school education 100 years ago. One hundred years before that, the same was true for a primary school education.
In the early 1900's, a dynamic nation built the free high schools it needed and hired the teachers. In the preceding century, it built a free primary school system that by 1850 was more widely attended than the system of any other nation.
Government did all this. But if we ask the nation to consider financing a four-year college education for everyone today, neither Republicans nor Democrats will entertain the idea. They even find it quaint and na´ve. We are mostly told that we cannot afford this and that individuals should fend for themselves.
Yet the president may soon be willing to borrow $2 trillion to privatize Social Security. Advocates say that the Social Security system will cost less in five or six decades as a result of privatization. But if that $2 trillion were channeled into college education, imagine the gains in new ideas, in a superior labor force, and in productivity in general.
Instead of bold new roles for government, the right increasingly reverts to a mantra about less government, while the left, hamstrung, offers few new imaginative plans for a changing society.
If our politicians realize that the purpose of government is to adapt to, and even promote, change, they may at last deal successfully with the nation's problems. At the moment, that looks unlikely.
Jeff Madrick is the editor of Challenge Magazine, and he teaches at Cooper Union and New School University. His most recent book is ''Why Economies Grow'' (Basic Books/Century Foundation). This article appeared in the New York Times.
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