We do not just have governments in order to rob Peter to pay Paul. We have governments because there are things they can provide that the private sector is either unable or unwilling to provide effectively – courts, police, schools, roads, other infrastructure, etc. Conservatives focus so much on redistribution that they tend to ignore this fact, but if you think about it, you’ll realize public goods are why we have government in the first place. [Emphasis added.]
I will cede that the court system is best administered by the government, given its coercive touch. However, the idea that there is no way the free market can provide policing, education, roads, and other infrastructure is simply foolish.
Regarding policing, consider that private investigators and voluntary constabularies have both played major roles in law enforcement for a decent portion of American history (with the former still in existence). Of course, there is not likely to be any free market policing of victimless crimes, like speeding and drug use, but I don’t see this as a down side, seeing as how the negative externalities of these laws as the relate to property rights are already handled by the law.
Regarding education, it is laughable to claim that the free market can’t provide schooling in light of the present existence of private schools, private universities and colleges, and home schooling. While a free market model would increase the probability that people would have to pay directly for education instead of soaking other people for the costs via taxation, this will encourage more efficiency and lower costs in the long run (and, let’s be honest, the current results of the modern public school system are simply abysmal), and will likely end the public-school-as-free-daycare model of education that currently plagues society today.
Regarding private roads, I will simply note that privatized highways currently exist, and that there have been many cases of privately funded roads. In fact, the modern road system was initially built on private financing from businesses. Furthermore, it is quite conceivable that the free market can provide lots of infrastructure. Sure, it might be more expensive, given the market tendencies of those entities known as natural monopolies, but this will likely help conserve resources and distribute them more equitably over time.
What’s also ignored in this “analysis” is the crowding effect that the government plays in competition for these services. For example, the government providing education at no cost to it recipients (or, more accurately, their parents) makes it considerably more difficult for other companies to compete since they cannot coerce people to buy their product. Really, once one accounts for the competition-distortive effects of government, it should become readily apparent that the claim that the market is unwilling to provide certain things, and thus the government must is simply wrong. Whether this claim is made in ignorance, malice, or plain stupidity is for the reader to decide.
However, both works share the same recognition of the intrinsically flawed nature of the three primary forms of government: monarchy, aristocracy and democracy. They also recognize the way these forms tend to degrade over time and transform into the others. Both Plato and Cicero are fundamentally skeptical about democracy, as Plato sees as the second-worst form of government leading eventually to demagogic tyranny as liberty devolves into license, whereas Cicero instead observes it as a prelude to aristocracy. [Emphasis added.]
I noted in a prior post
that wide margins of wealth inequality should be viewed with suspicion.
I now think, in light of Vox’s comments, that prolonged occurrences of radical inequality serve as evidence of a coming aristocracy.
Simply put, the elites will use their wealth and power to manipulate the political process for their own profit. As wealth inequality increases, the number of people excluded from controlling the political process increases, until there are only the wealthy elites who, practically speaking, control the political system, which is a de facto aristocracy.
In December 2002, the NDA made a very big move in pension reforms. They decided that from 1/1/2004 onwards, all new staff recruited into the government would be switched out of the traditional defined-benefit pension and instead placed into a new individual-account defined contribution pension system. This was one of the major achievements of the economic reforms of that period. For a conceptual picture of the New Pension System (NPS), see this article
, and for a story of that period, see this article
An essential feature of the NPS was that it was a defined contribution system. India has a long history with getting into trouble with guaranteed returns. UTI’s assured return schemes turned into a problem for the exchequer. EPS, run by EPFO, is bankrupt. When pension promises are made, they require peering into many decades into the future and arriving at estimates of longevity and asset returns. In the best of times, it is hard to make such estimates; honest mistakes are possible. In addition, when governance is weak, there are political pressures to make extravagant promises, which will look popular right now but generate staggering costs for the government in the future. As an example, rough calculations show that the implicit pension debt on account of the traditional civil servants pension in India (the one which was replaced by the NPS) stand at roughly 70% of GDP. This is a very big price to pay, for a tiny sliver of the workforce.
The NDA did the unpopular work of switching new recruits out of the defined benefit pensions. But the UPA did not follow through appropriately. At first, many years were lost in hoping that the CPI(M) would come on board the reform. After that, the legal engineering was put into place in order to get an NPS up and running without requiring the legislation. This process was slower than what one might have desired, but it has been making inexorable progress.
But now, a new existential threat seems to have come up : the Parliamentary Standing Committee on Finance seems to be saying that the fundamental idea of the NPS — defined contributions — should be scrapped. This would amount to a major reversal of India’s economic reforms.
On this subject, see:
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One essential feature of the rule of law is transparency. When a government says something, it must say why it said so. This is important from three points of view:
- A government that does not need to explain itself is one that has arbitrary power. When a policeman can tell you that you’re
prohibited from driving because he does not like your face, it is rule of men and not rule of law.
- The fundamental idea of common law is that the laws enshrine principles that are unvarying for decades or centuries. But
institutional and technological details of the economy change rapidly. Well reasoned orders tell the households and firms of the economy how timeless principles are to be interpreted in the present milieu.
- The aggrieved party can appeal against the order, on the grounds that there are factual errors or errors of reasoning in the
A success story: A recent SEBI order
I picked up a recent SEBI order banning a brokerage services agency from operating for two weeks. The punishment is not all that bad: the firm is out of business for two weeks. Yet, before inflicting such a penalty, SEBI had to do the following hard work in the order:
- Point out when the investigation was ordered.
- Clearly state which rules were violated. A vague reference to a governing Act does not suffice.
- Informs the reader about when the affected company was asked to respond. It also mentions that the copy of the investigation report was given to the company.
- The order then mentions the advocates who appeared for the accused.
- The findings of the enquiry officer are summarised.
- The observations of the enquiry officer are recorded.
- The arguments that the broker made in defense of its actions are presented.
- The exact transactions which were found to be illegal are described.
- The reasoning of the officer making the order is clearly laid out.
- The amount of penalty (suspension of certificate to trade for two weeks) is clearly mentioned.
This is a nice example of legal process in operation. It is a reasoned legal order. Anyone can read and understand it. The order adds to the body of law of securities in the country. It gives an example of the transactions which are considered illegal by SEBI: everyone can learn from the order and not make the same mistake. An appellate court can read the order and decide whether the action of SEBI was fair or not. More generally, SEBI is accountable to the public at large and Parliament in particular, to behave in such controlled
The right to operate is a very valuable thing. Interfering with the life and liberty of an individual or firm must not be taken
lightly. By providing a detailed order, SEBI clearly shows why this right was withdrawn from a person.
A failure story: A recent RBI order
A recent update from the Reserve Bank is a study in contrast. The order prohibits a company from providing money transfer services to India. The text just states that the company is barred from operating in India under the Payments and Settlement Systems Act, 2007. It seems that the company had applied for a licence for operating in India and that application has been rejected.
The order is not reasoned. It does not inform the reader as to why the company was banned. Did the company not comply with rules? If so, which rules did it not comply with? Were there any other reasons, such as inadequate capital, or lax oversight, or failure to enforce KYC rules, which led to RBI denying them the permission? Was there any other required disclosure that the company did not make? Was any hearing given to the affected party? The order/press release also does not state the procedure that RBI used to come to its conclusion.
This is not how common law should function. The order does not add to the body of law in the country. Prospective businesses do not
learn what led to the rejection of the application and may continue to make the same mistake when they apply.
The agenda for legal reform in India consists of (a) writing laws rooted in the common law framework, (b) of building agencies such as
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SEBI which are fully imbued in this ethos, and then (c) of building top quality courts like SAT which exert checks and balances upon
So if you believe the news, the City of Pittsburgh and its oversight board, the semi-euphemistic Intergovernmental Cooperation Authority (ICA), are duking it out. Trib: State pushes Pittsburgh to keep better financial records and PG: Act 47 panel rejects city’s financial system proposal
If two bureaucracies flail at each other on letterhead, do they make a sound? Hey, at least the poor beat reporters show up for those ICA meetings.
At issue appears to be $13 million the ICA is withholding from the city. Who knew? The issue seems to be the city’s lack of cooperation in a nominal agreement to merge its accounting system with Allegheny County’s accounting system as a cost-savings measure. The city wants to instead merge its accounting with the unerring financial wizardry of the Pittsburgh Water and Sewer Authority (PWSA). Maybe I mean sophistry?
Unmentioned is some of the odd story behind the PWSA’s own accounting system. Mentioned here 6 months ago, was some passing news that the PWSA wanted to ditch its use of software from SAP (that would be the largest business software company in the world by the way), for a company with 1/10th of 1% the number of employees, and it seems an even smaller proportion of experience in this market. Beyond the elusive logic of that, remember the city fully supports city-county consolidation.. something that getting some synchronicity between the two governments’ accounting would necessitate.
If the PWSA software does subsume the city’s accounting systems, I just can’t imagine what that Malaysian company will do with parking tickets that get sent out.
A. D. Shroff Annual Public Lecture, by C. B. Bhave.
It is a great honour to be invited to deliver the A. D. Shroff
Annual Public Lecture. Mr. A. D. Shroff was an outstanding
financial thinker and a practioner who took great interest in
organisational and ideological issues. He was known to express his
views in a candid manner and without any fear of the consequences of
such expression. Regulators have a reputation of not speaking much
and if they do speak then not saying much. I will try to strike a
balance between Mr. Shroff’s forthrightness and regulatory
Costs and benefits of regulation
The world has gone through very troubled times in the last three
years. Unbridled growth and development in the financial markets is no
longer an accepted article of faith. Deregulation in developed markets
resulted in excessive leverage being built by large institutions, and
financial innovation being used more to hide risk than create real
value. This inevitably led to a crisis and the cost of repair is
being borne by the tax payer and the economies in general.
Those who are bearing the costs are, in a substantial measure, not
those who reaped the benefits of unchecked growth. In the event, there
is no support for development without regulation. For orderly
development, regulation is a sine qua non. Notwithstanding the
fact that regulation is a must for orderly development, we still need
to enquire and debate what constitutes an appropriate regulatory
structure. We need to debate issues around this especially in the
At the very basic level, regulation means restraint and restraint
is a hindrance. Thus any business subject to regulation does pay a
price whether the regulation is voluntary or imposed. The question is
not whether regulation will come in the way of development but whether
the price we pay by accepting regulation is worthwhile or not.
Three kinds of regulation
If we look at various sources of regulation one can roughly say
that there are three reasons why business entities agree to regulate
their behaviour even though it does make them pay a price for such
regulation or restraint:
- The first source of regulation arises from the fact that the
commercial entity interacts with the outside world, suppliers,
customers, financers, shareholders and so on. There are certain
norms by which the entity decides to bind itself irrespective of
whether there are formal rules and regulations or deterrent
punishment for deviation from norms exists or not. No trader can
repeatedly violate his contract even if oral, with either his
customer or with his supplier. It will simply render his business
impossible. One can call this self regulation at its most basic
level with the source of discipline being the market place. The
market place simply does not deal with you if your behaviour is
substantially out of line with basic norms and we don’t need the
force of law here to enforce such norms.
- As a second source of demand for regulation one can look at
situations where entities engaged in a particular business activity
may decide to come together and conclude that certain norms of
behaviour are not adequately discouraged if the entire thing is left
to the individual entities. Yet, the group feels that such norms
need to be in place for the overall development of their
business. Since such voluntary groupings of entities do not enjoy
the force of law they may decide that any behaviour against the
agreed rules of behaviour will be punished by making the concerned
entity lose the membership of that group. Trade Guilds, clubs, the
early form of stock exchanges are examples of this. This form of
regulation is commonly known as self regulation. This self
regulation is not regulation of activities by the entity by itself
but is the regulation of the entity by a common interest group of
which that entity has agreed to be a member. For such a grouping to
succeed, individual members must be able to see the benefits of
membership. The price of being expelled from membership should be
high enough to ensure behaviour as per the commonly agreed norms by
the group itself. Our experience in India has not been entirely
satisfactory in this area. Nevertheless, we need to continue our
efforts at establishing credible self-regulation.
- That brings us to the third category of regulation which is
regulation enforced by law. The argument in such cases appears to be
that the activity of entities in a particular area of operation
affects the lives of more than just the member entities. In other
words the society has a stake in ensuring that the entities conduct
their operation in a manner that is acceptable not just to those
entities but to the society at large as well. The discontentment with
financial meltdown is very aptly captured by the expression
`privatisation of gains and nationalisation of losses’. This sentiment
is also a reflection of the fact that there are stakeholders outside
the universe of finance who suffer if finance is not regulated.
The interplay between self regulation and regulation by the
authority of law has been a subject of interesting discussion not only
in the area of capital markets but in other fields as well. Self
regulation is generally considered desirable since it is made by the
entities themselves and therefore,it is considered more business
friendly. Equally there are arguments that there are not sufficient
incentives in self regulation to put the interest of other
stakeholders before the interests of the participating entities. In
addition self regulation lacks the ability to enforce its rules beyond
depriving the member concerned the membership of the group. If a
significant group decides to violate norms the self regulatory
structure can become unsustainable and only the backing of law can
sustain such activity.
In different jurisdictions, efforts have been made to make the
deterrent actions of self regulatory organisations stronger by
granting such organisations `recognition’. However, difficulties arise
if more than one organisation wants to be recognised as a self
regulatory organisation for entities in the same area or business. In
other words if the entities split and form multiple organisations, all
of which seek recognition as self-regulatory organisations, the
situation is not amenable to an easy resolution. Notwithstanding the
various forms of self regulatory organisations and the different
degrees of strength and their deterrent actions, it is commonly
accepted around the world that self regulation alone is not sufficient
and an apex regulatory body is necessary.
The functions of the regulator
Regulation with the backing of legislation is administered either
by the Government itself or their autonomous statutory regulatory
organisations. While the model of Government being a regulator itself
has been tried in the past,the modern consensus is to have independent
and autonomous statutory regulatory bodies. In the wake of the
reforms undertaken by the Government in 1991, SEBI legislation was
passed by the Parliament in April 1992. SEBI has been created as an
independent statutory body.
What are regulators expected to do? Regulators set rules for
conduct of market entities, the manner of conducting business, and
even the tariff to be charged in certain cases. Regulators may also
lay down norms for entry as well as continuity of business for
entities. It is thus apparent that regulators can enjoy powers in the
area of rule making for entry / exit regulation, conduct regulation,
tariff regulation, and risk containment regulation.
Regulators not only set rules but are also required to keep an eye
on the compliance of these rules. They therefore, end up setting up
an elaborate mechanism for ensuring compliance. If despite this, the
rules are breached then the regulators are charged with the duty of
carrying out necessary investigation and enforcing these rules by
The question of autonomy of the regulator
The list of responsibilities is fairly onerous and since the
regulators combine in themselves the roles of rule making (legislative
role), administration of rules and investigation if breach of rules
occur (administrative function) and adjudication (judicial function),
it is necessary to pay careful attention to the governance issues of
regulators. It is an accepted principle that regulators need to be
autonomous in discharging the duties laid down by law. A regulator,
subordinate to or dependent on the executive wing of the Government
will not be in a position to do proper justice to its duties.
Autonomy is not only a matter of creating appropriate structures
and legal provisions but also a matter of perception. Regulatory
structures in India are in different stages of evolution and therefore
the thinking on autonomy and the perception of autonomy has not yet
The Reserve Bank of India as a regulator has been in existence for
more than 75 years and therefore, the relationship between the
executive branch of the Government and the RBI is far more evolved
compared to the relationship of regulators which are of more recent
origin. SEBI is in its 19th year and stands somewhere in the middle of
regulatory evolution: it is more evolved compared to the regulators
that have been set up in this century but has lesser history when
compared to the Central Bank.
The first Chairman of statutory SEBI, Mr. G. V. Ramakrishna, once
famously remarked in the early days that brokers of BSE should know
that the route from Dalal Street (BSE) to Mittal Court (the location
of the SEBI head office, then) is not via the North Block (Finance
Ministry, Delhi). The brokers at that time had not got used to the
idea of a regulatory body having been formed which would independently
set regulations. Capital market regulation was part of the Ministry of
Finance functions till the formation of SEBI. They therefore had a
tendency to run to the Government for every little problem.
The tension between the executive branch of the Government and the
regulatory bodies is not a phenomenon only during the early stages of
regulation nor is it peculiar to India alone. Both the regulators and
the executive need to nurture this relationship in a manner that
reinforces regulatory autonomy. It is not easy for the executive to
deal with this especially when the very powers that were exercised by
the executive are transferred to the regulator. It is imperative in
this context to make sure that there are adequate supportive
provisions in law and the rules to support the autonomous character of
To maintain the autonomous character of the institutions and its
independence from the executive one needs to start at the process of
the appointment and the terms of removal of the Members of the
regulatory apparatus. Interestingly, the framers of the Indian
Constitution saw the importance of this aspect in institutions such as
the Election Commission, the Higher Judiciary namely High Courts and
Supreme Courts and the Comptroller and Auditor General of India. The
Constitution makers were very careful in providing for the conditions
for removal of persons at the helm of these bodies even while
recognising that the appointments will be made by the executive. These
autonomous institutions have served India well. The prolonged tension
between the Election Commission and the other organs of the Government
is an example of how constitutional protection delivered a powerful
and autonomous Election Commission which admirably served the cause of
The regulators do not enjoy protection in terms of the
conditions under which their services can be dispensed with by the
executive. In fact the regulators are at the other end of the spectrum
in terms of provisions for their removal. In SEBI, the Members and
the Chairman are appointed for a tenure of certain number of years or
until further orders whichever is earlier.
A tradition has been established that regulators are not removed
from their jobs as easily as the functionaries in the executive
itself. There is no known example of the executive having resorted to
the clause `until further orders whichever is earlier’ to remove the
functionaries of the regulatory organisations. Whether it is
sufficient to rely on tradition or whether we need a better legal
mechanism with checks and balances needs to be debated, so that this
important aspect of governance is not ignored.
A vital component of autonomy is financial autonomy. In case of
SEBI and some other regulators such as IRDA this autonomy was built
into the legislation by way of providing that such authorities will
establish a separate fund into which the fees paid by the market
intermediaries will be credited. Such funds are to be used by the
authorities for discharging the functions entrusted to them by
Currently there is a line of thought – as you must have all read in
the media – that the regulatory authorities should not be allowed to
have funds of their own but these funds should be merged with the
Consolidated Fund of India. If the Government finally accepts this
line of thinking, substantial damage will be done to the autonomy of
regulatory institutions. If the regulators have to depend on the
executive for release of funds the question of independent behaviour
by the regulators would be jeopardised. It is necessary to carefully
consider the pros and cons of taking away financial autonomy from
The function of investigation in case of breach of rules is an area
that hinges in a vital manner on autonomy from the executive wing.
Regulators by the definition of their responsibility have
investigative wings. This function has come under increasing judicial
scrutiny and the movement of the last 15 to 20 years has been to free
the investigation function from the possibilities of influence by the
The CBI is a case in point. Under the direction of the Supreme
Court the supervision of this institution is with the Chief Vigilance
Commission which in itself is an independent statutory authority. I
would therefore, argue that regulatory autonomy vis a vis the
executive wing of the Government is not only necessary but is
The question of accountability
Any governance structure based on autonomy must also look into the
question of accountability. Since regulators have multiple roles, part
legislative, part administrative and part adjudicatory, the
accountability in the three areas is handled in different ways.
Regulators are creatures of law and the ultimate supervisory authority
of the Parliament to assess whether the regulators are discharging the
functions assigned to them is supreme.
The Comptroller and Auditor General of India is empowered under the
regulatory provisions to audit accounts of the regulators and submit
reports to the Parliament to help the legislative in its
assessment. In addition the regulators are required to prepare an
annual report on their activities and lay it on the table of both
Houses of Parliament.
The adjudicatory function of the regulators has been treated
differently and by its nature has to be a subject matter of
supervision by judicial bodies. A mechanism in the form of Securities
Appellate Tribunal headed by a retired High Court Judge and an appeal
provision to the Supreme Court of India forms an integral part of SEBI
The rule making powers of SEBI are supervised by the
Parliament in order to ensure that the rule making is confined to the
powers granted by the Parliament to the regulators. If a regulator
exercises power beyond the permissible limit of legislation, the rules
can also be challenged in the courts of law.
In the rule making function the regulators do interact with the
executive branch of the Government. The executive wing of the
Government will have legitimate imputs into the rule making process
and a fine balance is required between the need for autonomy and the
need for harmonisation. This is achieved through the presence of
Government representatives in the Board of SEBI.
In conclusion, it is quite clear that attempts at unregulated
development not only in a particular sector but even in small
sub-sections of sectors have failed. The failure is mainly because
such development ultimately leads to crisis. The cost of resolving
such crisis is high and the burden of the cost is borne not just by
those who benefited from the development but a large portion is borne
by those who were not part of the recipients of the benefits. Clearly
the collateral damage is very high.
The question is, therefore, not so much as to whether development
and regulation are in conflict as the quality of regulation that will
enable us to find a balance between the needs of development and the
need to keep the risk-reward relationship appropriate. It is
necessary to carefully think and design proper regulatory structures,
ensure regulatory autonomy and make sure that there are checks and
balances in the system to address the concerns of accountability as
Wagner’s law refers to the proposition of Adolph Wagner (1893) that there is a positive relationship between the level of economic development and the size of government. The underlying idea seems to have been that the demand for services provided by government tends to rise strongly as average incomes rise.
I think Wagner’s law still has a huge influence on the thinking of many economists. This influence is evident in the tendency of many economists to view big government as the norm for high-income countries. For example, it explains why economists pose questions like: Why doesn’t the US have a European-style welfare system? This is an odd question because there is considerable variation in the size of welfare states even within Europe and Swedish-style welfare systems are certainly not common among high-income countries outside of Europe.
The influence of Wagner’s law on the modern thinking of economists seems to rest on it being an empirical regularity or stylized fact. If you overlook the wide variation in size of government in high income countries, Wagner’s law does appear to fit some of the facts. Looking back at the recent history of individual OECD countries, most of them clearly had smaller governments 50 years ago when their average incomes were much lower. Yet, a recent study for the UK and Sweden from the beginning of industrialization until the present (a period of 177 years for the UK) found that Wagner’s law does not hold in the long run. The data are inconsistent with Wagner’s law in the initial industrialization phase (prior to 1860) and since the 1970s (Dick Durevall and Magnus Henrekson, ‘The futile quest for a grand explanation of long-run government expenditure’, INF Working Paper 818
The Durevall and Henrekson paper also rejects a rival theory – the ratchet theory – that government spending ratchets up in times of crisis (wars, social upheavals, recessions) and then tends to remain at the new higher level. The expansion of government spending in the 25-35 years following WW2 cannot be explained in terms of a ratchet effect.
Some people might try to rescue Wagner’s law by arguing that it always applies at some stage during the process of industrialization. Thus it might be argued, for example, that Wagner’s law will result eventually in the development of big governments in jurisdictions such as Hong Kong and Singapore that have been able to restrain growth in government, even though they now have relatively high average incomes. However, there do not seem to be any reasons why governments of high income countries would necessarily find it harder than governments of medium to low income countries to resist political pressures to become more heavily involved in activities such as funding of retirement incomes and provision of education and health services. Nor would they necessarily find it harder to resist arguments for the social welfare safety net funded by taxpayers to rise more than proportionately as incomes rise.
If we were desperate to rescue Wagner’s law perhaps we could argue that bigger government is an inevitable response to political pressures associated with the demographic transition – declining birth rates and aging population age structures – associated with economic growth. On this basis Peter Lindert argues that we should expect an expansion of the welfare states in East-Asian countries ‘as they age and prosper’. In OECD countries, including Japan, political systems responded to an increase in the proportion of old people in the populations by providing pensions for aged persons. The further aging of populations has led to increased government spending on pensions – a major factor associated with the growth of government spending in high income countries. Lindert asks: ‘Do we really know that China, Singapore and other East Asians will be more resistant to rising transfer budgets than Japan has been, when they approach Japan’s income level and age structure?’ (‘Growing Public’, Vol 1: 221).
My answer to Peter Lindert’s question is that I don’t know how East Asian governments will respond to an increase in grey power. Perhaps they will see what lessons they can learn from the experience of the big government welfare states of Europe and decide that there is a better way to fund retirement incomes. They might even decide that the compulsory savings approach that has applied in Singapore since 1955 is preferable to the absurdity of taxing people of working age more heavily in order to add unnecessarily to the retirement incomes of their wealthy parents.
This preliminary study started with a blog post I did several months ago entitled “New Jersey, the Sorry State”, a deep dive into Bureau of Labor Statistics data showing that my state is hardly generating employment outside the government sector.
The blame for this sorry state of affairs I heaped on NJ’s political culture, which is high-taxing, heavily-regulating, pro-union, anti-business and Democrat-dominated. As the power of Democrats, the self-proclaimed friends of the working man, has risen in this state, fewer working men have actually had work.
One of my readers suggested extending the work to all states. A daunting prospect, but I have made a start — back to BLS data for 51 deep dives. This time I’m looking longer term, with data from 1990 to the present.
To try to get to grips with party politics in all states through time, I researched affiliations of the governor and two senators and the plurality of the House of Representatives delegations and the state senate and legislatures for each year since 1990, using wikipedia and such other sources as I could find. No doubt there are some errors at this stage, particularly in identifying the leanings of state legislatures 15 or more years ago. These errors are minor; it’s unlikely that I could mistake Idaho for a blue state or Washington for a red state, for example.
Those two next door neighbors bracket my best ranking of the 50 states + DC by political complexion, from most Democrat to most Republican:
>> bluest: WA DC WV MA AR NJ CA MD IL HI DE
>> next: NY VT IA WI RI MI OR CT ME NC
>> middle: NM MN MT LA COPA NH ND IN TN
>> next: SD VA MS NV AL MO NE KS OK FL
>> reddest: KY OH AZ SC WY AK GA UT TX ID
Next best alternative ranking is so similar:
>> bluest: DC WA WV MA AR MD CA HI NJ DE VT
>> next: IL RI NY MI OR CT IA WI LA NM
>> middle: NC ME MN ND MT IN PA VA NV CO
>> next: TN AL SD GA NH KY MS MO FL NE
>> reddest: AZ KS OH TX OK AK SC WY UT ID
Let me point out a few things by way of caveats and highlight a few preliminary conclusions.
Conclusion 1: Government is not just New Jersey’s growth industry; it’s a growth industry in most states, Democrat or Republican. In fact, it is only in a handful of blue states and territories that government employment has been static or falling: MA, MI, NY, DC, and RI.
Conclusion 2: The predominant pattern in the last ten years has been for employment in goods-producing industry to be declining, in service-providing business to be growing somewhat, and in government to be growing fastest of the three. That pattern is seen in 37 states: AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, IL, IN, IA, KS, KY, MD, MS, MO, NE, NV, NH, NJ, NC, OH, OK, OR, PA, SD, TN, TX, UT, VT, VA, WA, WV, and WI; in MI it was declining but less than other employment. So at bottom, government is growing at the expense of goods production. In the limit, this places fiscal drag on the economy, which reinforces the original trend and makes it worse. That is our New Jersey experience.
Conclusion 3: The states that have experienced the greatest declines in employment in goods-producing industry are (worst first): RI, MI, NJ, CT, NY, NC, OH, ME, MA, and PA. Mostly northeastern/midwestern, mostly unionized, and mostly Democrat.
Conclusion 4: The states that have experienced the best performance in growing employment in goods-producing industry are (worst first): NE, CO, NM, SD, ID, MT, UT, WY, NV, ND. Near runners-up were TX, AZ, and OK. Mostly western, mostly right-to-work, and mostly Republican.
Conclusion 5: Only in Wyoming is employment growth in goods-producing industry positive and higher than either services or government.
Caveat: A Democrat is not the same wherever you go, nor is a Republican. A Maine Republican is a very different animal than a Texas or Wyoming Republican; in fact, some say it is a RINO. A Mississippi Democrat in 2009 is not ever the same as a Massachusetts Democrat, nor a Mississippi Democrat of twenty years ago.
Caveat, speaking of Massachusetts: In connection with the special election there on 1/19/2010, I and many others have taken to calling the Bay State “the bluest of all blue states.” This is incorrect. It yields to the blueness of the Washingtons (state & district) and West Virginia.
Caveat: Employment in goods-producing industry is not a holy grail and need not be the object of all economic policy. If someone leaves a job in the declining textile industry in North Carolina, retrains as a radiological technician and get a better job in that field, no one argues that either that person or the state of North Carolina are worse off. The problem is when employment in the goods-producing sector as a whole is in total headlong decline. That means industry is giving up on a place. That means industry prefers to take its chances with the Chinese Communist than the Michigan Democrats.
Caveat: Productivity has improved in goods producing industry, meaning fewer workers are needed to do the same or greater work. I know. That’s wonderful. But that productivity itself should incentivize capital to come into a place and employ workers who have worked themselves out of their jobs. If it’s not enough, other things are wrong, and the benefit of their productivity is not for workers to share. Politicians must ask the question, what else is needed to attract industry? Republicans ask that question; Democrats ask instead what other self-defeating social costs and regulations they can impose on job-creating enterprise.
Here’s one final caveat, and it is important. I don’t know which way the causation runs. I am not sure whether the growth states of the West are Republican because they are prosperous, or prosperous because they are Republican. I am more certain that employment grows in right-to-work states because it can, without restriction; that’s just economic common sense. Capital goes where it is well treated.
This much is clear. The employment restrictions and the class struggle nonsense offered by those friends of the working man, the Democrats, isn’t offering the working man in the post-industrial Northeast and Midwest any tangible economic return on his long-term political investment.
I say if you want to work, go R. If you want to stand on the unemployment line complaining about the Man, go D.
Andhra Pradesh was once seen as a state with good governance by Indian standards. In recent years, the problems seen with Satyam, attempts to harass Nimesh Kampani, etc. have led many to question the quality of governance in Andhra Pradesh. Today, John Elliott has an important article in the Financial Times on the difficulties of Andhra Pradesh.
I took a look at the CMIE data on investment projects outstanding to measure the share in the investment projects at hand in India. I found that the action was strongest in state-wise data for projects which were `Announced’ (and not `under implementation’). The two states with the biggest decline in the share in India were West Bengal and Andhra Pradesh:
For Andhra Pradesh, the decline over this period was 2.03 percentage points and for West Bengal, the decline was 2.44 percentage points. These are the two biggest declines across all the states in this period.
All these values are a far cry from the biggest share of Andhra Pradesh ever seen — which was 18.53% in December 2001, when Chandrababu Naidu was chief minister. For a comparison, the peak share seen for West Bengal was 8.25%, which was in March 2008, when the CPI(M) was still a part of the UPA; we can vividly see the decline from that point to 5.56% in the latest data. The full time-series for all states are here.
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The authors of ‘Governance Matters’, Daniel Kauffman, Aart Kraay and Massimo Mastruzzi, tell us that the World Bank’s rule of law index captures “perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts, as well as the likelihood of crime and violence” (Working Paper 4978, p 6).
On the basis of that description the index seems highly relevant to assessment of whether societies have institutions that enable their members to live in peace with one another. (For background on reasons why I am interested in such indexes see: Is a ‘good society’ index a good idea?)
I think it would be more appropriate to describe this index as a legal institutions index than as a rule of law (RoL) index. The rule of law is the ancient principle that no-one, not even the king, is above the law. It possible for a jurisdiction to have a relatively high score on the World Bank’s RoL index even though its legal foundations for rule of law may be somewhat tenuous e.g. Hong Kong. (Someone might be interested in a previous post on the question: Is rule of law an esoteric concept?)
As with the five other indexes in the World Bank’s suite of governance indicators the RoL index is based on perceptions based data reflecting the views of a diverse range of people, including tens of thousands of household and firm survey respondents and thousands of experts working for the private sector, NGOs, and public sector agencies. The aggregation method gives greater weight to indicators that are correlated with each other.
The RoL index seems to cover similar ground to the Legal structure and property rights sub-index (LSPR) of the Fraser Institute’s economic freedom index. Indicators incorporated in the LSPR cover: judicial independence, impartial courts, protection of property rights, military interference in legal and political processes, integrity of the legal system, contract enforcement and regulatory restrictions on sale of property.
The chart below shows how closely the World Bank’s RoL index and the Fraser Institute’s LSPR index correspond to each other. The blue diamonds represent actual indexes and the pink diamonds represent the predicted value of the LSPR index using linear regression.
In later posts relating to good society indicators I will use the World Bank’s RoL index as an index reflecting the quality of legal institutions.