David Leonhardt’s New York Times Magazine piece on how to transform (not just stimulate) the American economy is worth reading. But I don’t share his enthusiasm for Mancur Olson’s explanation of national economic success.
Firms, workers, and citizens tend to organize in interest groups, and those groups sometimes obstruct markets and solicit government favors that benefit themselves at the expense of the larger society. Olson argued, in a 1982 book titled The Rise and Decline of Nations, that in democratic countries such groups grow increasingly powerful over time. Regulations, tax preferences, and government expenditures end up more and more directed toward these special interests rather than the general interest. Economic growth suffers. (The theory is a bit more complicated than that, but I’ll set the complexities aside here.)
Leonhardt says this helps us understand why economic growth in the U.S. has been slower than we’d like it to be. He endorses Olson’s sentiment that what’s needed is to periodically weaken interest groups’ strength and influence.
Olson’s hypothesis seems sensible enough. The trouble is, it’s difficult to find supportive evidence. Leonhardt, like Olson, looks to the experiences of rich nations. He contrasts the United Kingdom with Germany and Japan:
England’s crisis was the Winter of Discontent, in 1978-79, when strikes paralyzed the country and many public services shut down. The resulting furor helped elect Margaret Thatcher as prime minister and allowed her to sweep away some of the old order. Her laissez-faire reforms were flawed in some important ways … and they weren’t the only reason for England’s turnaround. But they made a difference. In the 30 years since her election, England has grown faster than Germany or Japan.
It’s helpful to broaden the comparison to include other countries. Olson suggested we assess his theory based on the timing of the last major societal disruption each country experienced. The longer the period since a disruption, the more powerful interest groups will be and hence the slower the rate of economic growth. The following chart uses this measure (based on a scoring by Erich Weede), with an update to account for the Thatcher disruption in the U.K., Reagan’s in the United States, and a similar one in New Zealand beginning in the late 1980s. Economic growth needs to be adjusted for the catchup effect, whereby nations with lower per capita GDP grow more rapidly simply by virtue of borrowing technology from richer countries. The chart shows catchup-adjusted economic growth in twenty nations since 1973, when the postwar “golden age” of rapid growth for all countries ended. Olson’s hypothesis predicts a positive association. But it isn’t there.
The level of unionization is another indicator Olson used in assessing his theory. Here Olson’s hypothesis predicts a negative association. It too doesn’t pan out.
Olson’s interest group account of economic success and failure may have some merit. But it offers little help, if any, in understanding economic growth patterns over the past few decades.