vol. 53, no. 2 (October), 1985,
Public Expenditure and Government Growth
edited by Francesco Forte and Alan Peacock
Oxford: Basil Blackwell, 1985, pp. iv, 233
This volume consists of fourteen papers that were presented at a conference
in Italy in 1984. The editors' introduction, "The Political Economy of
Public-Sector Growth and its Control," prepares the reader for the book's
emphasis on the economic analysis of the political process. In terms of
subject matter, audience, and tone, there is a strong family resemblance
to The Political Economy of Taxation, also edited by Forte and Peacock,
published in 1982, and reviewed in vol. 49, no. 3 of this journal.
The sixteen contributors
represent half as many different countries; their backgrounds, though dominated
by academe, include both fiscal and monetary institutions of government.
The book's appeal derives largely form the diversity of perspectives together
with the melding of arm-chair theory with hands-on experience.
The theories and methods
of Public Choice form the thread on which the individual chapters are strung.
Fiscal authorities, both taxers and spenders, are maximizing agents, as
are the interest groups with whom they deal. The first five chapters, which
make up Part I, take this to be the most plausible and fruitful assumption
for "Analyzing and Testing Public-Sector Growth." The remaining nine chapters,
which make up Part II, are concerned with policy issues. Bound by the code
of wertfreiheit, the contributors keep their own value judgments
in the (not-too-distant) background as they grapple with "Public Choice
and the Control of Public-Sector Growth."
In Chapter 1, Dennis C.
Mueller and Peter Murrell shed some light on "Interest Groups and the Political
Economy of Government Size" by theorizing in terms of the net marginal
impact—votes gained by a political party minus votes lost—from adding a
given interest group. In Chapter 2, Paolo Martelli gets some mileage out
of Buchanan, Tullock, and the Prisoner's Dilemma in an account of "Legislative
Choice and Public-Spending Growth." The "government utility function,"
according to Martelli, includes as one of its arguments a certain "deficit
aversion." But recent U.S. experience suggests (to the reviewer, at least)
that this particular argument is a particularly weak one. Chapter 3, "Fiscal
Autonomy of Non-Central Government and the Problem of Public-Spending Growth,"
is concerned with the fiscal relationships between the different levels
of government. Giorgio Brosio identifies the effects of separating the
tax and spending decisions and shows that the fiscal strategy of taxing
centrally and spending locally can foster the growth of public expenditures.
Ilde Rizzo provides evidence for Brosio's claims in Chapter 4, "Regional
Disparities and Decentralization as Determinants of Public-Sector Expenditure
Growth in Italy (1960-81)". In Chapter 5, Gianni Zandano builds a bridge
between the two parts of the book with his discussion of "Collective Choice,
Social Welfare, and Growth."
Bruno Frey begins Part II
by asking "Are There Natural Limits to the Growth of Government?" His Chapter
6 contributes importantly to an answer by employing the Laffer Curve to
establish parallels between the economics of taxation and the economics
of regulation. In Chapter 7, Kurt Schmidt considers the "Spirit of the
Age as a Determinant of the Development of Public Spending." Within a given
constitutional framework, changing spending levels may reflect changing
tastes for public spending. But there is a Duesenberry effect at work:
Government grows up more readily than it grows down. In his "Control of
Public-Spending Growth and Majority Rule," Francesco Forte suggests that
majority rule offers inadequate control. He prefers detailed constitutional
rules which specify, inter alia, limits on external and internal
debt. Chapter 9, contributed by Alan Peacock, deals with "Macro-economic
Controls of Spending as a Device for Improving Efficiency in Government."
Peacock argues that spending limits are more easily agreed upon in the
large than in the small, but he concludes that constitutional limits, while
necessary, are not sufficient for effective control of public spending.
With Chapter 10, the focus
shifts to the more traditional macroeconomic concerns. Vito Tanzi's "Monetary
Policy and Control of Public Expenditure" itemizes the ways in which monetary
growth gives rise, both directly and indirectly, to growth in public expenditures.
During an expansionary period, the prices of the things that governments
typically buy (resources for long-term, interest sensitive projects) rise
faster than prices in general. And because of the nature of the bureaucratic
process, budget requests are more likely to over-compensate than under-compensate
for anticipated future price increases. Nout Wellink and Victor Halberstadt's
topic in Chapter 11 is the same as Tanzi's, but with "Special Reference
to the Netherlands." The focus here is on monetary targets and the behavioral
relationship between the monetary and fiscal authorities.
The final three chapters
deal with "Market and Non-Market Alternatives in the Supply of Public Services."
Charles Blankart's Chapter 12 takes up the "General Issues" by discussing
the different categories of privatization: pricing government services,
deregulating industry, selling government-owned industries, and outside
contracting. Ian Byatt's Chapter 13 provides an eye-witness's account of
the "British Experience with Privatization" in the early 1980s. Carla Marchese's
Chapter 14 offers a discussion of transactions costs and the limits of
privatization, followed by "Some Empirical Evidence" that establishes a
link between the level of public expenditure and the proportion financed
through the pricing of government services.
The book is not without
its shortcomings. In many instances, too much in the way of underlying
macroeconomic theory and policy goals is taken for granted. Those most
likely to read this volume are—quite apart from considerations of Public
Choice—most unlikely to grant the desirability of multifaceted macroeconomic
management on the basis of a conventional Keynesian framework. Few will
assent, for a specific instance, to the claim made in Chapter 11 that "In
the longer run, both monetary and budgetary policy have, of course, one
single objective: the realization of balanced and sufficient economic growth
with an adequate consumption/investment mix at a low rate of inflation,
a low level of unemployment and an external position which is more or less
in equilibrium" (pp. 176f.). Public Choice theorists are more likely to
take for granted that the need for essential government services (if any)
is the only justification for government spending, that taxes should pay
for these services, and that the monetary authority should match the rate
of monetary growth to the market-determined rate of real economic growth.
A second shortcoming, not
at all unique to this book, concerns the empirical evidence offered to
bolster the various theoretical insights. Tests based upon single-equation
models are followed by a brief mention of possible simultaneous-equation
bias or other structural complications. Most of the actual empirical testing,
however, is so blatantly crude that the blatancy itself tends to shield
the empirical work from criticism: Critics are reluctant to point out illegitimacies
that are known by all to be illegitimacies. But not this critic. While
forma reduced-form equations may be useful for extrapolating trends
(on the assumption that the underlying structural relationships—whatever
they are—remain unchanged), they provide no basis whatsoever for testing
those structural relationships. Alternatively stated, tests based upon
reduced-form equations are pro-forma tests.
In fairness, it should be
recognized that tests of this sort and other such empirical crudities characterize
much of what passes in today's economics profession as scientific research.
Perhaps this state of affairs is to be explained in terms of evolved criteria
for publishability. It seems almost as if no discursive analysis, however
insightful, is deemed worthy of publication without empirical testing,
and no empirical testing, however crude and baseless, is thought unworthy
of publication. Might it be that some economic researchers, while fully
appreciating the limits of the single-equation model, have deliberately
adopted the maximizing strategy that they impute to their subjects?
Finally, it must be said
that several of the chapters are just badly written and that most all of
them would have benefited from a final polishing. But despite these shortcomings,
this conference volume has made a contribution to our understanding of
public expenditure and government growth. Specialists will find many insights
that merit further exploitation—empirically and otherwise; generalists
will be treated to a broad sampling of applied Public Choice.
Roger W. Garrison