My two cents on the sharp rise of partisanship and congressional polarisation is they are driven by the great restraint in the growth of government spending in the 1980s.
From 1950 to 1980 the size of government doubled but then stopped dead in the 1980s. This great restraint on the growth of government happened everywhere. It was not just Thatcher’s Britain or Reagan’s America. It was everywhere, France and Germany, and even Scandinavia.
Source: Sam Peltzman, The Socialist Revival? (2012).
Peltzman’s data which I have charted has government spending in the USA, Britain, France and Scandinavia doubling between 1950 and 1980, and then nothing much happened between 1980 and 2007 – the size of government was pretty flat as a share of GDP for 27 years.
Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality.
Government spending grew in many countries in the m-d-20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups Importantly for explaining later political polarisation, that growth of government was concentrated in four programs – defence, health, education and income security
The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg which underwrote the initial growth in the size of government. The rising deadweight losses of taxes, transfers and regulation limit inefficient policies and the sustainability of redistribution.
After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution to protect what they had. More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Reforms ensued after 1980 led by parties on the Left and Right, with some members of existing political groupings benefiting from joining new coalitions.
A lot more is at stake when the main political battleground is dividing a relatively fixed revenue pie post-1980 than a growing pie Between 1950 and 1980. Fiscally conservative voters will elect parties strongly committed to no new taxes. Their opponents will look for equally ideologically committed parties. Peltzman makes the very interesting point that:
There is no new program in the political horizon that seems capable of attaining anything like the size of any of these four. For the time being the future government rest on the extent of existing mega programs.
Health and income security account for 55% of total government spending in the OECD. It is in these two programs where the future of the growth of government lie.
The pressure for that growth in government will come from the elderly. Governments will have to choose between high taxes on the young to fund the current generosity of social insurance, healthcare and old-age pensions or find other options. Peltzman explains this political tension for programs benefiting the elderly in his essay The Socialist Revival:
Deficit financing of future growth in these programs becomes increasingly problematic. So we now have the seeds of political conflict rather than consensus.
These very large programs confer substantial benefits on some. These beneficiaries resist any change in the status quo. But the benefits have to be financed at substantial cost to today’s workers. Many of them will not benefit on balance from these programs over their lifetimes. It is by no means clear whether the number of winners exceeds the number of losers today.
Policies that were once unthinkable now can be discussed and even implemented here and there. These include increased retirement ages, less generous public health care programs, more reliance on private saving for retirement and so forth.
Given that intergenerational and other struggles over who is taxed and who faces benefit cuts, middle-of-the-road politicians lose their appeal to the electorate.
Another reason for greater political polarisation is the rising cost of time. Sound-bites news programs and current affairs are now a couple of seconds long when they used to be 15 seconds long maybe 30 years ago.
People have less time to pay attention to politics so they want to work out quickly from short sound-bites whether the politicians they are contemplating supporting are made of the right stuff. For voters in a hurry, conviction politicians are more appealing be they of the left or of the right. Voters want someone who will hold fast against new taxes or for new taxes as the case may be. Much is at stake as Sam Peltzman explained in his 2012 essay The Socialist Revival:
The steady growth of the old age population share is on the verge of a substantial acceleration… This means that government health care and public pension spending growth will also have to accelerate merely to keep the promises implicit in present programs.
The political economy will have to choose between higher taxes on the young to keep these promises, an accelerated shrinkage of the rest of the budget or less generous public health and pension programs. It is not clear yet which way the decision will go.
What is clear is that for the first time since the invention of the welfare state the magnitude and generosity of its signature programs is at political risk.
In this stand-off between those who might have to pay more in taxes and those who might receive less in old age pensions, welfare benefits and services including healthcare, neither side wants a politician naturally inclined to blink and compromise. They will elect politicians who hang tough for their side of the argument and their share of the budget.
In its 2014 Consumer Issues report, released under the Official Information Act, the New Zealand Commerce Commission said:
We are seeing signs that NFC transaction systems are replacing the current eftpos payment system with its lower fee structure.
This could result in a transaction fee structure monopoly, and increased charges to consumers as traders pass on their increased transaction costs through surcharges or increased prices.
The Commerce Commission seems rather concerned that one form of supply will be displaced by another at a lower price. This is the scourge of lower prices – a major preoccupation of competition authorities. They are yet to accept that lower prices should be always lawful under competition law.
The distribution of firm sizes reflects the rise and fall of firms in a competitive struggle to survive with competition between firms of different sizes sifting out the more efficient firm sizes (Stigler 1958, 1987; Demsetz 1973, 1976; Peltzman 1977; Jovanovic 1982; Jovanovic and MacDonald 1994b). Business vitality and capacity for growth and innovation are only weakly related to cost conditions and often depends on many factors that are subtle and difficult to observe (Stigler 1958, 1987).
The New Zealand Commerce Commission, the competition law enforcement authority, seems to have an infuriatingly simple and out-dated understanding of the meaning of competition. Joseph Schumpeter and Ronald Coase would be turning in their graves.
The efficient firm sizes are the sizes that survived in competition against other sizes. To survive, a firm must rise above all of problems it faces such as employee relations, skills development, innovation, changing regulations, unstable markets, access to finance and new entry. This is the decisive (and Darwinian) meaning of efficiency from the standpoint of the individual firm (Stigler 1958). One method of organisation supplants another when it can supply at a lower price (Marshall 1920, Stigler 1958).
What is even more distressing is the Commerce Commission is applying their archaic concept of competition to an industry subject to rapid innovation. Regulating innovation through competition law is never a good idea. The more efficient sized firms are the firm sizes that are expanding their market shares in the face of competition; the less efficient sized firms are those that are losing market share (Stigler 1958, 1987; Alchian 1950; Demsetz 1973, 1976).
If the firm size distribution in an industry is relatively stable for a time, the firms are their current sizes because there are no more gains from further changes in size in light their underlying demand and cost conditions (Stigler 1983; Alchian 1950; Demsetz 1973, 1976).
Temporary monopoly and rapidly changing market shares with the occasional dominant firm are all characteristics of the early stages of any new or innovating industry. The deadweight social losses from the enforcement of competition law are at their greatest in industries undergoing rapid innovation because of the possibility of error is at its height. Optimum firm sizes continually change over time because of shifts in input and output prices and technological progress (Stigler 1958, 1983).
If large firm size is better at serving consumers, the large firms start to grow and smaller firms will die or be absorbed until the untapped gains from growth in firm size are exhausted. Firms increase in size and decrease in number when this adaptation becomes necessary to survive. If a smaller firm size is now better, smaller firms will multiply and the larger firms will decline in size because they are under-cut on price and quality.
The life cycle of many industries starts with a burst of new entrants with similar products. These new or upgraded products often use ideas that cross-fertilise. In time, there is an industry shakeout where a few leapfrog the rest with cost savings and design breakthroughs to yield the mature product (Jovanovic and MacDonald 1994a; Boldrin and Levine 2008, 2013). Fast-seconds and practical minded latecomers often imitate and successfully commercialise ideas seeded by the market pioneers using prior ideas as knowledge spillovers. Their large market shares are their prizes for winning the latest product races, not the basis of their initial victories.
New entrants regard a large firm size as a premature risk rather than an advantage of incumbency they should mimic as soon as they can. New firms set-up on a scale that is well below the minimum efficient production scale for their industry (Bartelsman, Haltiwanger, and Scarpetta 2009). New entrants choose to start so small to test the waters regarding their true productivity and the market’s acceptance of their products and to minimise losses in the event of failure (Jovanovic 1982; Ericson and Pakes 1995; Dhawan 2001; Audretsch, Prince and Thurik 1998; Audretsch and Mahmood 1994).
Competition law can subvert competition by stymieing the introduction of new goods and the temporary monopoly often necessary to recoup their invention costs and induce innovation. The puzzlingly large productivity differences across firms even in narrowly defined industries producing standard products lead to doubts about the efficiency of some firms, often the smaller firms in an industry. Some firms produce half as much output from the same measured inputs as their market rivals and still survive in competition (Syverson 2011). This diversity reflects inter-firm differences in managerial ability, organisational practices, choice of technology, the age of the business and its capital, location, workforce skills, intangible assets and changes in demand and productivity that are idiosyncratic to each individual firm (Stigler 1958, 1976, 1987; De Alessi 1983).
Technological progress comes from innovations that are the result of profit orientated research and development in the course of market competition. The two main inputs into innovation are the private expenditures of prospective innovators on R&D workers and equipment and the publicly available stock of knowledge on which they hope to build (Aghion and Howitt 2008). Any profits of successful innovators last until others innovate to supersede previous innovations (Aghion and Howitt 2008).
Harold Demsetz argued that competition does not take place upon a single margin, such as price competition. Competition instead has several dimensions often inversely correlated with each other. Because of this, a competition law disparaging one form of competition will result in more of another. There are trade-offs between innovation and current price competition. Manne and Wright noted in the paper, Innovation and the Limits of Antitrust that:
Both product and business innovations involve novel practices, and such practices generally result in monopoly explanations from the economics profession followed by hostility from the courts (though sometimes in reverse order) and then a subsequent, more nuanced economic understanding of the business practice usually recognizing its pro-competitive virtues.
A competition law enforcement authority should never pretend to know which trade-off between innovation and price competition and between competition and temporary monopoly are optimal. Every competition authority should simplify the regulatory environment by simply saying lower prices are per always lawful. The New Zealand Commerce Commission should do this but it has not.
I have not even touched on the use of competition law to subvert competition such is the pursuit of Microsoft and Google by its business rivals through competition law.
The easiest way to tell if a merger is pro-competition is if the remaining firms in the market oppose it. If it was anti-competitive, they could match the higher prices of the merged firm. The reason they oppose the merger is the merged firm will start undercutting them on price. When was the last time a competitor complained about their rivals putting their prices up? Either they hold their prices and take their business or follow their pricing lead: can’t lose.