Here is a chart of Federal revenue as a share of GDP in Canada, posted by Livio De Matteo, one of the newer bloggers at Worthwhile Canadian Initiative:
Many a contemporary American libertarian dreams of the day when US Federal spending is confined to ~15% of GDP. However, in the real world this happens in a country that has a fairly robust single-payer basic health care system*, early-childhood-on education initiatives (a previous Conservative government even passed a fairly robust school choice plan that was subsequently killed by a Liberal government after 2 years), and a generally higher level of simple transfers. Some transfers don’t make a whole lot of sense, and kind of get caught in backflips, but nevertheless, there it is. Canada seems to take in ~15% of GDP in taxes, although there is a fit about the budget deficit, which is measured in the happy-go-lucky millions.
I think this lends some credence to the notion that I know Matt Yglesias and Kevin Drum are partial to. That is, ‘largely release people from sources of grave uncertainty (like spells of unemployment, extreme health care and education bills, etc., which can be done at a relatively cheap cost), and sensible market reforms become much more popular’. I can see Canada leading the way in replacing their income tax with a revenue-neutral carbon tax.
But there is a chicken-and-egg story here, as noted by Joseph Heath**:
…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.
The US government, by contrast, has a tax code that is seemingly designed, from the ground up, to keep tax accountants and attorneys employed. Our institutional structure is to blame for most of this, but our relatively low individual tax rates (compared to other rich democracies) enable it.
This is an important story since we’re wading into a battle between spending cuts and raising revenue. As I think about the issue more, I notice that few of my complains come from the entitlement state at all, and the ones that do are about the structure of programs, not the programs themselves. In contrast, I have major complaints about the revenue side of government, and still more major complains about the regulatory side of government (at the local, state, and Federal levels). I think a lot of self-styled libertarians or people who lean that way feel the same way. I don’t think that utilitarian redistribution is a bad trade for some of my other goals (which would likely uncomfortably expose certain segments of the population to the cold whims of the marketplace). How about you?
Note: Provincial spending in Canada pushes government/gdp up to ~32% vs ~28% in the US.
*With the option of pursuing private insurance above and beyond. Not my preferred plan, but it seems work on average.
**Filthy Lucre, pp57-61
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Saturday ~ April 9th, 2011 at 12:47 am
Brett
I blame it on the pro-cartelism that was rife both in big business and progressive circles in America in the early to mid twentieth century. Because of that, we ended up with a kind of corporatism through regulation.
They allow supplemental insurance, but outside of some very specific areas of treatment in Quebec, private insurance can not cover the same stuff as the public insurance programs do. That’s not hard to understand, since the Canadians want to minimize the formation of a two-tier medical system through queue-jumping via money.
It works pretty well, although the French and German systems work even better (both in terms of overall treatment, cost, and wait times).
Saturday ~ April 9th, 2011 at 8:32 am
Th
Interesting contrast with how the US established Medicare Advantage. Was it supposed to be a two-tiered system or a pilot project to show private markets more efficient that a public program? Or maybe just a vehicle for funneling tax dollars to insurance companies? How can anyone from any ideological standpoint defend spending more tax dollars for the same service (when the costs are even with regular Medicare we can talk about the added benefits of some plans) and yet the program continues.
I also notice that federal spending stayed above 20% for over 20 years. Are Canadians living off of the infrastructure put in place back then and are only fooling themselves by their low spending now, or did they shift spending to the provinces?
Saturday ~ April 9th, 2011 at 1:26 am
Hyena
I guess the only question then is what provincial-level spending consists in and whether lower national spending is because more of it is shifted to provinces.
Saturday ~ April 9th, 2011 at 5:36 am
Eric Crampton
Health spending comes mainly out of provincial budgets, albeit with lots of federal regs around it. I think the provinces contribute about sixty percent of health funding once you net out federal grants.
Saturday ~ April 9th, 2011 at 1:02 pm
Brett
That’s one of the reasons why I figured a modification of the Canadian system might work with the US system of government (whether it’s politically possible is another question). It’s a federal system, with the provinces running their plans and paying for most of them, and working under the Canada Health Act of 1984. Technically, a province could reject the funding and ignore the CHA, but it’s pretty unlikely.
Medicaid is like that. Medicare could have been like that, had they designed it as such (why did they go with a wholly centralized program with Medicare, and a federalized program with Medicaid?).
Saturday ~ April 9th, 2011 at 1:53 pm
Th
We could hope they did it that way to test which works better. My cynical side says they did it that way because elderly people vote and children don’t. It is clear now that Medicaid spending is counter-cyclical and should not be paid for by states with balanced budget requirements. Why this has not been changed is beyond me. I guess there would be an even greater transfer of money from donor states to poor states and this is probably why Canada uses their current model.
Monday ~ April 11th, 2011 at 2:04 pm
Canada: A Real-World Liberaltarian Model? | Brucetheeconomist's Blog
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Wednesday ~ April 13th, 2011 at 3:32 pm
Barry
“…it is important to observe that this lack of a correlation [between redistribution and long-term growth of GDP per-capita per Peter Linder's work] does not show that economic theory is false, that incentives don’t matter, and that government cna do whatever it wants. The lesson to be learned is exactly the opposite. One of the major reasons that big-spending governments tend not to be penalized by the market is that, due to their very bigness, they need to operate more efficiently, and they need to work harder to get incentives right.”
I’d place this as a just-so story.
As for Canadian government spending, there are some important factors:
1) A more efficient health-care system can lead to less spending on healthcare. In the US we have a f*cked-up systems where a lot is lost in trying to make the other guy eat your costs, encouraging somebody to switch to your ‘product’, and by having healthcare delivered late and badly (e.g., the emergency room). And people stick with jobs due to healthcare insurance (ISTR a study saying that the rate of small-business formation was higher in Canada, after adjusting for the obvious factors, because starting a small business in Canada didn’t carry the threat of losing healthcare coverage).
Please note that this doesn’t count the human and economic costs of not getting rational and adequate healthcare.
2) The whole military-industrial complex. Not just staight up DoD, but all of the parties which profit by getting a chunk of the action (a la the fabled weapon system with sub-contractors in every Congressional district), plus the hidden costs (e.g., black budget, DOE, VA, etc.). Also the sucking of talent into a black hole.