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Big Government 2.0: Liberals may reshape economic landscape

The political stars seem to be aligning for a liberal resurgence.

Americans are as uncertain about the economy as they have been in a generation; the political success of the Democratic Party over the past two election cycles have bolstered the confidence of liberals that their message is a winning one; and the massive intervention in the economy on the part of the Bush administration has opened the door for even greater interventions and bailouts in the coming months. Every day it seems a new industry is asking for a government bailout.

Does all this signal that the era of small government is over?

First of all, let’s get something straight: Whatever strides conservatives made over the past few decades, by no means was this an era of small government. In almost every aspect of the American economy government’s power has been omnipresent, and in many ways it has grown over the years.

No small-government era in decades
Despite their efforts, conservatives never succeeded in actually scaling back the size of government. Government’s share of the American economy (federal, state and local) amounts to 36 percent of the economy.  Not since the early 1960s has government’s share of the economy been less than 30 percent, while during the New Deal government spending was closer to 20 percent of the economy. In recent decades there has been no era of small government.

Yet conservatives have made great strides in limiting the scope of government interference in the economy, and those gains are very much in danger if the left is allowed to implement its agenda. President Ronald Reagan streamlined the tax code, and for the most part Republicans and even moderate Democrats pushed policies aimed more at generating economic investment and growth than directing specific economic outcomes.

Government’s effect on economic opportunity and prosperity goes far beyond the simple effect of setting the size and priority of government budget. Rules, regulations, the rates and structure of the tax code can all have a dramatic impact on the shape of the economy and its prospects for economic growth.  The worst effect of government can come from trying to micromanage the outcomes of the economy in ways large and small.

No industrial policy to threaten dynamism
Unlike Europe and Japan, until now America has avoided the mistake of putting in place an industrial policy that would threaten the basic dynamism of the economy. Big government has been a drag on the productivity and growth, but at least the private part of the economy has been largely free.

The real danger of a resurgent left is not that it will continue or expand the growth in government spending — as troubling as that may be — but that liberals will try to use their newfound power to reshape the American economy into some utopian image and in the process destroy the foundation for future economic prosperity.

Liberals’ comfort with the use of government power to reshape the economic landscape — and with it the opportunities each of us has in shaping our own economic destiny — is the greatest danger we face in the coming years. President-elect Barack Obama is already pushing an agenda that is rife with tax credits, new regulations, and selective government investments that amount to a de facto industrial policy along the lines of those that have failed so miserably in other countries where they have been tried. Picking winners and losers has led to economic stagnation in European countries and Japan, whose economies generation only about three-fourths the wealth of our own.

In the coming months and years conservatives will be charged will need to fight the battle for free markets on two fronts: limiting the size and scope of government taxes and spending on the one hand, while simultaneously working to limit overt government direction of the economy. If we lose that battle, the next decade will be characterized not only by large and growing government, but less economic freedom, dynamism and growth in the economy.

David Strom is a senior policy fellow with the Minnesota Free Market Institute.

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Comments (4)

  1. Submitted by Tom Poe on 11/18/2008 - 08:55 am.

    David: The economic collapse of our society, if not due to free market failure, then what? Why would we want to make sure the free market is protected, if the only thing that would result is yet more failure? What is it you are trying to point out?

    On September 19, 2008, Paulson demanded entitlement for Bush’s $1 trillion dollar going away present for his cronies. That was the moment the Republican party admitted it is the Party of Corporate Welfare. America does not tolerate corporate welfare.

    Those who still believe in corporate welfare (noncompetitive government contracts increased 115% between 2000 and 2005, according to Waxman’s Committee on Government Oversight and Reform) and free markets need to find another party to join.

  2. Submitted by Bernice Vetsch on 11/18/2008 - 12:21 pm.

    If ever an “economic landscape” needed reshaping, it is ours after eight years of Bush-Cheney corporate-friendly policies.

    Tax cuts for the wealthy: Not used to create jobs, at least not in America. Actual result? About half the national debt is the result of the revenue lost by giving these cuts. We MUST let them expire.

    Preemptive war: $12 billion per month added to our debt to China and perhaps others. Real purpose for war? To assure oil supply by choosing oil-company friends (Exxon, BP, others) to develop all new drilling in Iraq — with 70+ percent of the profits going to the companies. Smart move by Iraq? It chose a Chinese company instead (which will not get any of the profits).

    Deregulation to allow “creativity?” Enron and the current financial meltdown are the result … and the unemployment, loss of health care, huge increases in credit card debt for those with no other way to pay their bills. ET CETERA.

    Bye-Bye ideology. Hello pragmatic problem-solving that will actually help the poor and middle classes instead of those who need no help.

  3. Submitted by Thomas Swift on 11/18/2008 - 05:12 pm.

    “On September 19, 2008, Paulson demanded entitlement for Bush’s $1 trillion dollar going away present for his cronies. That was the moment the Republican party admitted it is the Party of Corporate Welfare. America does not tolerate corporate welfare.”

    What? Isn’t there some sort of minimum waiting period before the left can rewrite history?

    The GOP congressional caucus voted against the initial bailout once, but was unable to keep some of it’s RINO members from capitulating in the face of a very determined Democrat effort.

    History will show that Democrat party instigated the financial meltdown by a deliberate manipulation of existing regulation for political gain and the creation of quasi-governmental agencies to compete (unfairly) with the private sector.

    History will also show that it is the Democrat party that was at the forefront of the unprecedented government handout that is occurring even as we speak.

    The names Pelosi and Frank will loom large in the unrevised history of the economic collapse we are suffering.

  4. Submitted by Todd Hintz on 11/26/2008 - 02:19 pm.

    I’m curious where the assumption came from that small government is automatically good and large government is always bad. I’m personally not a proponent of either: I simply want good government no matter what the size.

    It appears that the laissez-faire attitude towards regulation isn’t any more well grounded in this era than it was in the 1920s or 1880s. People forget history and don’t realize (or don’t care) that regulations were originally implemented because some schmuckly decided to game the system, go for broke, and the consequences to society as a whole be damned. Such “me first, you last” thinking lead us to the robber barrons of the 1800s, rampant pollution in the 1900s, and more recent meltdowns such as Enron’s manipulation of California’s elctrical market and our current housing and credit disasters.

    I’m more interested in a nuanced approach than simply “Government bad. Regulation bad.” Show me something more thoughtful than a proposal to throw the baby out with the bath water.

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