By Matthew Yglesias

Nobody on the left ever really talks about the issue of exactly how big we can envision big government getting down the road. So I’m glad Kevin Drum took this important subject on even though I don’t really agree with his answer:

I am, oddly enough, not really in favor of vastly increased funding for other social programs. Some increased funding is OK, but it should be kept under pretty strict scrutiny — and not just on the generic grounds that all spending ought to be monitored carefully to make sure it’s effective and pruned away when it’s not.

Here’s why. I’m obviously more open to high government spending than most conservatives, but even liberals think there’s a limit to how much of the economy ought to be under government control. Speaking for myself, I’d put that limit at 40-45% of GDP. Somewhere in the low 40s, anyway. Currently, total government spending (state/local/federal) is in the low 30s, which means we can afford to increase spending by about 10% of GDP. I figure that changes to Social Security will eat up about 2% of GDP and funding a true national healthcare plan will eat up around 7-8%. That doesn’t leave room for very much more, and even reductions in defense spending only give us another point or so to work with. So we should be pretty careful with other long-term spending commitments.

The way I think about this goes back to a root dispute I would have with the right about the nature of public sector work. A lot of people on the right point to things being done not-so-efficiently in the public sector and say—aha! government is inefficient, we need to let the market in. I look at it the other way around. Where markets work well—primarily in the field of producing consumer goods—they create incredibly efficiencies. But there are lots of fields of endeavor in which markets don’t work well. Since well-functioning markets are the best method we know of creating efficiency, this is a problem. It tends to leave those fields of endeavor plagued by certain kinds of inefficiencies. But since some of these things are very important, they wind up getting taken over by the public sector. Which is, yes, less efficient than the private sector. But not because the public sector “doesn’t work” and its responsibilities need to be turned over to the market but because the things that belong in the public sector are precisely those things for which turning it over to the market isn’t a realistic option.

Meanwhile, one needs to understand that, somewhat counterinuitively, when you have a very efficient economic sector what happens is that it tends to go away. Consider agriculture. Our modern-day agricultural technology is way better than what was available 200 years ago. But agricultural progress hasn’t meant that everyone goes to work in the super-charged high-tech agriculture of the future. It’s meant that more food than ever is grown with fewer person-hours of labor than ever. We should expect this to continue apace. For all the talk of trade’s impact on American manufacturing, the bigger issue has been automation and robots. But either way, even though people will continue to consume manufactured goods—just as we still eat—manufacturing will be a less-and-less important part of the economy. Not because manufacturing “isn’t important” but because it’ll get more efficient. And that’s how the whole private sector part of the economy will go. Markets, doing their work, will make those sectors more and more efficient leading them to shrink as a share of the overall economic pie.

What will be left is big government. Or, rather, bigger and bigger government. Teaching kids. Taking care of the elderly. Patrolling the streets. Making the SUPERTRAINS run on time. And it’s going to be fine.

Which isn’t to say we should crank spending up to 93 percent of GDP next year. But it does mean I don’t think we should set an arbitrary limit. And it also does mean that it’s always important to find ways to make the public sector more efficient and more effective. It can be done. Public agencies are better-and-worse managed and offer better-and-worse performance. But it’s difficult to do and it doesn’t happen automatically the way it does in a well-functioning market. And it also means, as I’ve been taking to saying lately, that we need to think about garnering more revenue in ways that have non-revenue benefits. For example, market-rate prices for street parking not only raise revenue, but allow for more efficient allocation of parking spaces. Similarly with congestion pricing on crowded roads. Auctioning carbon permits will keep the planet habitable and raise some money. Taxes on alcohol and sweeteners would have public health benefits. And on and on down the road.

By Brian Beutler

David Cho reports:

The Obama administration has finished drafting the central elements of its plan to rescue the financial markets and is gathering feedback from regulators and Wall Street executives, sources familiar with the matter said yesterday….In finalizing the plan, officials have made a policy decision that could dismay lawmakers. The administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid but instead retain looser requirements initially included in the Treasury’s $700 billion rescue program, a source familiar with the deliberations said. Officials are concerned that harsh limits could discourage some firms from asking for aid.

Meet the new boss. You’ll recall that the “looser requirements initially included in the Treasury’s $700 billion rescue program” are the same ones that allowed bailed out banks on Wall Street to hand out $18 billion in bonuses to the very people whose combined efforts drove those banks into the ground. It’s worth repeating that $18 billion is a significant percentage of the total funds the government distributed to them, and that if the money had been loaned to other banks–for brief stretches at high interest–it would still be there, keeping them afloat. Instead, it’s gone.

Of course, there could (and should) have been stricter compensation requirements written in to TARP in the first place, to make it something like an opt-in emergency fund. That would have discouraged (at least to some extent) solvent banks from walking away with unnecessary taxpayer money, and had the ancillary benefit of isolating zombie institutions from those in greater health. Instead, Paulson forced all the major banks to take billions and billions of dollars. He sunk the cost. And now Obama officials believe (or say they believe) that imposing pay restrictions will lead executives to run their institutions (further) into the ground.

TARP could have been better in many ways, obviously, but this underscores once again one of the obvious advantages of short-term nationalization–that if the government controls the bankrupt companies, there’s no real need to hash out the terms of compensation restrictions, and, therefore, no cottage industry dedicated to finding loopholes in those provisions. But, in the words of our new Treasury Secretary, “we have a financial system that is run by private shareholders, managed by private institutions”. And that’s true, it seems, even if those institutions’ only value lies in the hope that the government will green light billions of dollars in upward wealth redistribution to their executives and shareholders.

By Matthew Yglesias

Megan McArdle writes about a potential problem with stimuli:

The real question, I think, is how close the permanent income hypothesis is to being true. The basic idea is that people are forward looking, and they try to smooth their consumption over time. So if you give them a “temporary tax cut”, they save most of it, knowing that eventually they will have to give the money back.

But of course, this should also be true of “temporary government spending”–if people think the money won’t be there next year, they’ll salt as much of the money away as possible. This is a topic very underexplored in the various estimates of the stimulus multiplier, even though consumers are massively overleveraged and will presumably save as much of their new income as they can.

I think common sense tells us that the permanent income hypothesis is very far from being true. You could imagine an alien species whose psychology functioned this way. But that species wouldn’t have heavy smokers dying of cancer, problems with overreating and sedentary lifestyles. Voters belonging to that species would condemn governors who take advantage of boom times to cut taxes and hike spending—there would be massive popular pressure to sock it all away in a rainy day fund.

It’s clearly true that in the present situation people are saving more and spending less. But the reason can’t be that they’re perfectly forward-looking—the evidence for high rates of time preference and myopia is too overwhelming.

by Ryan Avent

Let me also thank Matt for having me this week. In addition to being a SUPERTRAIN co-conspirator, Matt’s links have been crucial in building the audience for my little personal blog. I don’t know if that makes him my blogfather, but it was a really helpful. And I don’t know how my body reacts to bullets. My working assumption is — badly.

As Matt mentioned, I write about economics, but I also focus on urban planning and environmental issues. To save time, I usually try and cover all three at once. Like Brian, I’m amazed by Matt’s versatility and prolificacy, and I anticipate falling short of his standards on both counts. But hey, he got three of us, and he’ll probably be unable to resist putting up five posts a day of his own.

Anyway, glad to be writing for you. Hope you enjoy it.

By Brian Beutler

A hearty thanks to Matt for opening his site up to me. In addition to being an all around great and brilliant guy, Matt’s also my “blogfather” (or one of my blogfathers) and certainly one of the people who has most influenced my own approach to the medium. The bad news is that he’s much, much better at this game than I am. So you can expect my posts to be both less frequent and less insightful than his.

A bit about me: I like to write about politics, Congress, climate change and issues, like domestic surveillance and torture, at the nexus of national security and civil liberties. In the interest of shaming Petey, if such a thing is possible, it’s true: I’m not bulletproof. I, like Wolverine, am perfectly penetrable by bullets. Unlike Wolverine, unfortunately, it takes me a bit longer to heal.

Oh well.

At any rate, I’ll be focusing most of my attention on this site this week, but will probably check in at my own site from time to time. I hope some of you follow me there.