Does the federal government of the United States (US) need the ability to go further into debt to save the United States’ economy (Golden Goose) from its various foibles? I would suggest asking, does a drunk just need larger bar tab to give him time to overcome his illness? With the debt ceiling rapidly approaching, surely the thought surfaced that the first step in getting out of hole is to stop digging. Complicating this debate is that the current administration (and least half of Congress) believes that the federal government it actually adept at correcting the foibles of a free market economy. The notion that the federal government has the ability to correct free market has evolved into what could be called the D.C. disease, or Demigod Confusion (Coleman, 2010).
Is it the responsibility of the federal government to correct the economy when it goes off track? And perhaps more importantly, how effective is fiscal policy when it comes to bolstering the free markets? If you answered the previous two questions, yes and quite effective, you are likely in agreement with the current (and previous) administration(s) who believes(ed) that the federal government is actually adept at correcting the unpredictable free market economy. One could argue that this belief stems from the notion that the United States’ (US) economy (Golden Goose) was saved from the Great Depression by the New Deal, launched in 1933. The reality is that the Great Depression spanned from 1929 to 1940. Our Goose hit bottom in 1933 (unemployment peaking at 25%) and languished with about 15% unemployment, until the build up for World War II. Using today’s 2008 start date of the Great Recession, the US very well could be looking at 2019 as a possible turn around year. Nevertheless, this same fiscal strategy is the predominant tool in the current administration’s Save the Goose bag.
John Maynard Keynes would likely go into coronary arrest if he knew how his theory had led to enormous deficits and an unfathomable 14 trillion dollar debt. While Keynes thought that it was up to government to artfully stimulate the economy during down times, the second half of Keynes’ theory, was for government to “get out” of the economy during periods of growth, and pay off any debt created by the earlier stimulus. This concept has not only been ignored, it has been violated with abandon. While ignoring this obvious shortcoming for the moment, one could ask, is the federal government “any good” at tweaking the economy. Certainly, the US would not be in the fiscal crisis she is in, had not the second half of the Keynesian theory been ignored. But this still begs the question, does federal government have the ability to correct free market? Or is it part and parcel of what I call the D.C. disease.
Looking back at the Great Depression, why did the US economy struggle for almost eleven years? One could point out the ill-advised Smoot Hawley Tariff Act enacted in 1930, and the contractionary monetary policy of the Federal Reserve (FED), as acerbating factors, and not receive much argument. Some contend that only World War II was able to lift the U.S. out of its malaise. The FED apparently learned from history and has done quite the opposite in setting a course of expansionary policy. Further, since we have significant war expenditures, and we have yet to move on the Obama notion of reexamining trade agreements, [such as the North American Free Trade Agreement which Obama called “devastating” and “a big mistake” (as cited by Easton, 2008)], one has the luxury to judge whether the fiscal policy initiatives of the US Congress and the President have been a positive force in remedying the current US economic woes. Looking back, one must at least consider the notion that the strategy employed by Franklin D. Roosevelt of creating social and work programs, (as a means of stimulating the private sector), was the reason that economy remained stagnant and beleaguered for the 11 year stretch. If that was the case then, and we are using the same New Deal playbook, this would mean that we are choking the Goose instead of reviving it.
Is the federal government well on its way to saving the Golden Goose one more time? In 1998, Gwartney, Lawson and Holcombe seemed shed some light on this when they appeared in front of the US Council of Economic Advisors. Their testimony summarized a report which examined statistical data of 23 countries, with regards to the size of government and the rate of economic growth.[i] The report unequivocally showed that once the size of a government expanded beyond 20% of Gross Domestic Product (GDP), the rate of economic growth began to decline. Taking into account of all levels, the size of government is approaching 50% of the US GDP of which the federal government represents about 25% (Coleman, 2010). Arguably, looking at sheer size of government alone ignores the notion that the removal of private resources for public use represents a significant loss in productivity for the private sector. Perhaps the siphoning off of private resources for public use has finally put the Goose under too much strain. This expansion of government necessarily means that there are fewer resources which produce market goods and services (Hazlitt and Bastiat make this point nicely). This Production Deficit can be quite significant if the government is attracting the best and brightest, tying up large amounts of capital, provisioning large percentages of land, and otherwise attracting entrepreneurial talent to its employ (Coleman, 2011).[ii] Thus, leaving one to conclude that government spending is not the same as you spending your own money; and government jobs are not just different than private sector jobs, they are productively detrimental. This is not to say that limited government is not potentially beneficial (Gwartney et al. made this point) or public workers are not working, but it is to say, that their efforts are not producing products and services to be sold in the private market. The US is currently losing out on almost 20% of its potential labor force, just to run all levels of government, many of whom have advanced degrees in engineering, law, accounting, economics, sciences, linguistics, criminal justice, business, and political science (Coleman). In addition, when government ladles out the best and the brightest, this comes at a cost. This is not to say that government should hire the dimmest and the dullest. Just that whoever is hired by government is not going to be starting any business, innovating or contributing to overall production of the economy.
A second point is that while everyone seems to compare the current predicament to the Great Depression, the US was in bad shape in the late 70’s as well. Carter was dumped in 1980 with unemployment rates and inflation rates in double digits. The interest rates were also incredibly high as well (around 16%) and the USSR was a real threat. The reaction of the Reagan administration in 1981 was the polar opposite of the Obama administration. Instead of increasing control at the federal level and passing more restrictive laws, the focus was on the “freeing up of the market” and reducing taxes. The result was that productivity recovered, inflation dropped, interest rates plummeted, and the economy was back on its way. And if one cared to check the inside cover of the McConnell & Brue (16e) text, personal income tax receipts bounced back to previous levels within one year. Contrast that to today, when the US economy suffers from what could be called Supply Anxiety (Coleman, 2010). Expressed differently, what company (and not just corporations) wants to take on new employees or expand operations, when the federal government is increasing regulation, threatening with cap and trade laws, implementing national healthcare overhauls, and threatening new to impose new taxes?[iii] Whether it is the EPA, FDA, NSA, EEOC, or SSA, any business would be crazy to do anything but get lean as possible, and hold on to see how this was all going to play out. Programs such as the Cash for Clunkers and the first time buyer rebates might seem to be a good idea for the uninitiated, but it is not too difficult to realize that fiscal policy that helps one person has a negative impact on someone else. Buying a new car, instead of driving your old car might be good for Ford or Toyota, but what about all the workers who make a living off repairing or maintaining older cars. Additionally, one has to ask: Does legislation, which all but forces small mortgage companies out of business and reduces competition, stimulate the economy? Or does a 3.8 percent tax on all home sales going into effect after 2012, as part of the Healthcare bill, stimulate the economy?
Yet here we sit, with our metaphorical Golden Goose in the burning barn, with many looking to the government to fix the situation, and politicians pointing fingers at each other. The D.C. disease cause most to see the federal government as the solution, but my mantra has become: when the barn is burning, don’t ask the arsonist how to put out the fire. His answer will be more matches.
All that is left to say is Save the Goose!
Bastiat, F. (1850). Selected essays on political economy. Seymour Cain, trans. 1995. Library of Economics and Liberty. Retrieved July 11, 2011 from the World Wide Web: http://www.econlib.org/library/Bastiat/basEss1.html
Coleman, D. (2011). An improved rationale for public choice. Germany: VDM Publishing House.
Coleman, D. (2010). What a fine mess. US: Tate Publishing.
Easton, N. (2008). Obama: NAFTA not so bad after all. CNN Money. Retrieved fromhttp://money.cnn.com/2008/06/18/magazines/fortune/easton_obama.fortune/
Gwartney J., Lawson R., & Holcomb R. (1998). The size and functions of government and economic growth. Retrieved from http://www.house.gov/jec/growth/function/function.pdf
Hazlitt, H. (1946). Economics in one lesson. Retrieved from http://prawo.uni.wroc.pl/~kwasnicki/EkonLit/Economics%20In%20One%20Lesson.pdf
[i] While several studies have challenged the cause and effect relationship, most of the critics limited their arguments to delineating specific activities of government and the types of taxes which may or may not have been detrimental to the economy.
[ii] This concept was nicely illustrated by Bastiat (1850) and later by Hazlitt (1946).
[iii] This is not just about the Bush income tax cuts either. The income tax is irrelevant for most Americans. Other than being the worst way to collect taxes and a compliance abomination, if a tax payer is making less than $50,000, it has no effect. For incomes under $100,000, the effective rate is only 10%. Those income taxes have been shifted over to fees, local taxes, sales taxes, payroll taxes and Social Security taxes.