Be Clear-Eyed About Democracy's Weaknesses

July 21, 2017
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Be Clear-Eyed About Democracy's Weaknesses

In her new book, “Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America,” Nancy MacLean writes that my Bloomberg View colleague Tyler Cowen, by questioning American political institutions, was creating “a handbook…for how to conduct a fifth-column assault on democracy.” As the Hoover Institution’s Russ Roberts pointed out, Cowen’s quote was taken out of context. This is worth noting because Cowen has long been a staunch defender of democracy.

But it’s no secret that Cowen is willing to think critically about the potential weaknesses of the U.S. system. He does this not to attack democratic ideals, but to defend them. If we want to see democracy endure, we must think realistically and pragmatically about its weak points, so that we can focus resources on shoring them up.

It’s very dangerous to indulge in triumphalism about one’s own form of government. Yes, democracies appear to have a modest statistical advantage when it comes to economic growth. But that’s just a statistical trend, not an ironclad proof of economic superiority. Plenty of autocratic countries have experienced rapid growth, from Germany in the 19th century to South Korea and Taiwan in the early 1980s. What’s more, there’s a chance that the modest correlation between democracy and growth is driven by one massive outlier — the U.S., whose alliance and patronage was undoubtedly a big economic advantage for many democratic countries during the 20th century.

Right now, democracy is being questioned more from both within and without. It’s worth asking if this is because democratic systems have some unique economic challenges that were systematically ignored in previous decades.

Economists have long known that democracy doesn’t always lead to the most economically efficient outcome. The Nobel prize-winning economist Kenneth Arrow famously proved that no democratic political system can give all its citizens what they want in in all situations. Of course, real political systems don’t even come close to optimality, so this finding is a bit academic.

But economic theory also points to a more concrete problem — the difficulty democracies have in providing public goods. One of government’s essential roles is to provide things that benefit people other than those who directly pay for them. Examples include national defense, infrastructure and basic research. Education and health care also have some aspects of public goods, since a healthy and educated populace creates broad benefits for everyone. Because free markets generally won’t provide enough of these things, government needs to pick up the slack.

When building infrastructure, authoritarian countries don’t have to worry about hurting the few to help the many. China forcibly relocated 1.2 million people to build a dam in the 2000s. Fortunately, that wouldn’t be possible in the U.S., but it does mean that American companies are often forced to compete against authoritarian rivals that have access to cheaply built world-class infrastructure.

Paying for public goods can also be difficult. People differ both in their ability to pay and in the amount of benefit they derive from the public goods. Typically, countries use different types of taxes to take these two things into account — gas taxes to fund highways, and income taxes that fall more heavily on the rich. But economic theorists have figured out that under a fairly general set of conditions, no tax regime can possibly provide a good deal for all citizens. Either government ends up not providing enough public goods, or it runs a budget deficit.

There is an alternative. It’s possible to balance the budget and provide the optimal amount of public goods, but only if some rich people are forced to pay very high taxes. But the amount of top-level taxation required is so steep that many rich people would rather just quit the system entirely — move to another country, or abolish the government. This fairly general mathematical result probably explains many rich people’s affinity for libertarian ideas.

It also may explain why most democracies carry large amounts of government debt:

A Problem of Democracy

Gross central government debt as a share of GDP in 2014

Source: World Bank

This is also a recent phenomenon. Until about 1980, the U.S. did a good job of balancing its budget. But after 1980, structural deficits began to appear:

Built for Deficits

U.S. federal debt as a share of GDP

Source: Federal Reserve Bank of St. Louis

Did this happen because globalization gave rich people the option to move their capital — or even themselves — overseas if their taxes got too high? That’s what the simplified economic theory would predict.

If so, this presents a problem for democracies. Authoritarian countries such as China or Russia can implement capital controls to prevent money from flowing out. But democracies — or any liberal system that allows freedom of personal and financial movement — may struggle to balance their budgets in a globalized world.

It’s precisely because we want democracy to survive that we must not ignore its special challenges. Making it taboo to even discuss these issues would be a big mistake. The free world needs fewer over-optimistic cheerleaders, and more thinkers like Tyler Cowen, who love democracy but are willing to think about its flaws.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net

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