Big News: Government Policies Don't Accomplish Much

In a shocking repudiation of their entire philosophy of governance, the New York Times reported that there are limitations to the effectiveness of government policies and programs:

Roughly a century ago, many Swedes immigrated to America. They've done very well here. Only about 6.7 percent of Swedish-Americans live in poverty. Also a century ago, many Swedes decided to remain in Sweden. They've done well there, too. When two economists calculated Swedish poverty rates according to the American standard, they found that 6.7 percent of the Swedes in Sweden were living in poverty.

In other words, you had two groups with similar historical backgrounds living in entirely different political systems, and the poverty outcomes were the same.

Although the Times doesn't want to say so, the vaunted Swedish welfare system, to which liberals always point as an example of what America should be doing, made no difference at all.  We have the same poverty rate among Swedes as they have.  The Times did point out that they saw the same result with respect to health care, however:

A similar pattern applies to health care. In 1950, Swedes lived an average of 2.6 years longer than Americans. Over the next half-century, Sweden and the U.S. diverged politically. Sweden built a large welfare state with a national health service, while the U.S. did not. The result? There was basically no change in the life expectancy gap. Swedes now live 2.7 years longer.

Again, huge policy differences. Not huge outcome differences.  [emphasis added]

The simplest and best way to measure the effectiveness of a nation's health-care system is to look at how long people live.  The Swedes in America have about the same life expectancy as Swedes in Sweden in spite of the fact that Sweden has a very expensive health-care system for which people don't pay directly, whereas America expects people to pay for their own health care either through private insurance or by paying their own bills.

Despite living under very different health care systems, American Swedes live just about as long as Swedish Swedes.  The Swedish system makes no difference to overall lifespan.

The article goes on to describe huge differences in outcome among various racial groups in the United States.

The average Asian-American in New Jersey lives an amazing 26 years longer and is 11 times more likely to have a graduate degree than the average American Indian in South Dakota.

American Indians in South Dakota haven't been neglected; far from it.  To the contrary, we have an entire department, the Bureau of Indian Affairs, which is charged with ensuring that Americans of Indian descent thrive and prosper.  Despite billions of dollars spent over the past 150 years, American Indians continue to have less favorable outcomes than Asian-Americans who receive no government help.

There are only two possible explanations for this utter failure of our government to help American Indians in any measurable way:

  1. American Indians are inherently so inferior that nothing can help them.  We've seen enough successful American Indians - no, not most of them, but certainly enough to prove they exist - to know that this can't be true.
  2. Government programs, although well-intentioned, have the perverse effect of harming those they're supposed to help.

We've been involved in enough government programs to assign a high probability to explanation #2.

Creating Wealth

Suppose that a group of national leaders actually want to better the lives of their citizens.  Let's imagine that they're keenly interested, not in gaining or keeping power, not in getting rich personally, but in helping their citizens live better, more fulfilling lives.  How should they go about it?

They could establish a minimum wage as so many have advocated.  People who pass such legislation feel good about themselves, but they displace workers who're trying to pick themselves up from the bottom of the economy.

The American minimum wage was set at $.25 per hour in 1938.  At that time, my grandfather owned a factory which employed several hundred people.  Some of them were getting $.10 per hour.  Since they weren't worth $.25 per hour, he had to let them go.

Time Magazine has noted that people without skills need low-end, low-paying jobs to get started in the work force.  A minimum wage is out if you want to help everybody prosper.

A government-run welfare system is out, too.  Since our welfare costs took off during the Great Society in the mid-sixties, we've bred generation after generation of people who see no need to work and have no desire to contribute anything to society.  Being worthless eventually makes people feel worthless, which is not good for them at all.

Government can build roads and other infrastructure to increase economic activity, but only up to a point.  Building new useful infrastructure increases economic efficiency and thus national wealth, but there's always a temptation to spend money on ineffective construction projects just to help out the politically-connected.  The more infrastructure you already have, the less likely that new projects will be chosen wisely and benefit the citizenry.

Protecting jobs by making it hard to lay people off makes businesses reluctant to hire and leads to huge numbers of young people being unable to find jobs at all.  It helps if there are simple, orderly processes for starting businesses, enforcing contracts, and shutting down failures.  Establishing transparent property rights makes it easier for would-be entrepreneurs to borrow money - no sane bank will lend money against a business that doesn't exist yet, but clearly-owned property is good collateral anywhere in the world.

The best thing the government can do if it desires to increase national wealth is simply to get out of the way.  From 1945 until 1989, the Chinese Communist government suppressed businesses and their people lived in poverty.  When the leadership realized that they had to let their people become wealthier or face rebellion, they backed off.  Hard-working, profit-seeking businesses then brought about the Chinese miracle.

Government is much better able to do harm than to do good.  In a single sentence of such transcendent truth that it should be emblazoned over the door of each and every government office, department, and agency, the Times summed up the whole matter:

Bad policy can decimate the social fabric, but good policy can only modestly improve it.

Will Offensicht is a staff writer for and an internationally published author by a different name.  Read other articles by Will Offensicht or other articles on Economics.
Reader Comments
The Chinese Miracle is inappropriately named. So named because it was inconceivable to economists that an incredibly poor country could turn itself around because it had never happened before, that they care to remember anyway.

Strong governments with pro business policies provide an environment for economies to grow rapidly.

The German economy fell apart following World War I thanks to the short sighted treaty the Allies forced upon Germany. Germany was seen as a miracle as it pulled out of the pit of economic collapse. The German government pulled the German state from the edge of collapse (or perhaps past it) to a strong economic footing very quickly.

China's turn around isn't a miracle. A strong government allowing more or less true capitalism to thrive coupled with a world that is turning increasing less capitalistic. While their success was not a foregone conclusion in retrospect one can see that any nation with a strong government could do exactly as the Chinese have done.

Note strong government does not equal large government. It means capable of enforcing its laws through out the polity.
May 21, 2010 1:52 PM
Jony is right about government being able to enforce its laws, or at least enough of them for business to be done. China has weak due process and a culture of bribery, but businesses seem to be able to find their way around that.
May 21, 2010 3:07 PM
Good point, jonyfries, and an excellent distinction perhaps we should explore in future articles. America had a much STRONGER government 100 years ago than we do today, because our laws were far more regularly enforced (immigration law anyone?) But there were way fewer of them. Government did fewer things, but did a much better job of them.
May 21, 2010 4:03 PM
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