vol. 53, no. 2 (October), 1985, pp. 536-37           


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 pro 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 pro-forma 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
Auburn University