Government: Stay out of the Economy

The current expansion of government intervention is going to undermine economic growth. Pro or con?

Pro: Unhealthy Interference—and Math

Over the past nine months, government intervention in the economy has spread like a wildfire. From federally mandated executive compensation rules for companies and job roles that had nothing to do with the financial meltdown, to the ouster of General Motors (GM) CEO Rick Wagoner at the behest of the White House, to forcing banks to take and keep Troubled Asset Relief Program money, Washington’s tentacles are reaching into the minutiae of private business dealings like never before. Setting aside the long-term philosophical questions this raises about the role of government in society, one short-term question is whether or not it will aid recovery. I do not believe it will.

A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product. Even before today’s unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government’s share to more than 40%. A single federal health-care plan would gobble up another 16%, putting more than 50% of the economy in government’s hands.

Economists increasingly understand the Great Depression was prolonged by government intervention in trade, private industry, and banking. We have evidence from other countries, too. As Ireland’s tax burden and share of GDP fell, the Celtic Tiger roared. Recent National Bureau of Economic Research findings show that Jamaica’s pursuit of "social justice" policies has retarded its growth compared with its less interventionist sister island, Barbados. From 1960 to 2002, Barbados’ per capita GDP doubled, but Jamaica’s grew only 50%.

Government has an important and legitimate role to play in a growing economy. It should enforce contracts, create a level playing field for all businesses, and steadfastly promote the rule of law. U.S. entrepreneurs can take it from there.

Con: Call It Friendly Intervention

There are times when excessive government spending can be a drag on the economy, but now is clearly not that time. In case anyone missed it, the private economy has collapsed. It has been shedding jobs at the rate of more than 600,000 a month for the last six months. There are absolutely no signs this decline is about to turn around any time soon.

In this context, President Obama’s recovery package is providing essential support to the economy. Although signed into law only three months ago, it has already provided a boost to the economy by preventing tens of thousands of layoffs by state and local governments. These governments would have been forced to dismiss teachers, firefighters, and other workers due to plunging tax revenue. While many governments are still making cutbacks, the number of jobs lost is much smaller than it would have been without the stimulus.

In the months ahead, millions of jobs will be directly and indirectly created as the stimulus spending starts to percolate through the economy. Workers will be hired to repair roads, retrofit buildings, modernize the electric grid, and perform hundreds of other tasks paid for by the stimulus. These workers will then spend their paychecks on their mortgages, at retail stores, at restaurants, and in other places, generating new demand and creating more jobs.

Would the private sector somehow be creating more jobs if the government was not employing workers rebuilding our infrastructure? Are there factories that would have hired workers but chose not to because the government is repairing the roads? Did restaurants cancel plans for expansions because the government is keeping teachers employed?

That story does not make sense. We need the government to support the economy right now. We would have many fewer jobs without the boost to government spending.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

random

"Economists increasingly understand the Great Depression was prolonged by government intervention in trade, private industry, and banking."

No. Right-wing think tanks trying to use the current economic crisis to push their belief of eliminating any and all control on businesses is good are publishing revisionist history at fever pitch.

For almost 70 years, economists were pretty confident that government intervention helped stabilize an economy in free-fall that was exacerbated by Hoover's crippling tariffs that undermined international trade. Now, suddenly there's a grand revelation and every "economist" working for a Republican or neo-conservative activist group suddenly decides to change course.

Can you please stop messing around with history to fulfill your personal desire to be right? You might delude yourself and people whose confirmation biases will predispose them to believe you, but you won't sway anyone else.

Socialist Pig

Nobody really knows how to fix this for sure. Let's just print enough money to pay off all of our debts. Seems to be working so far. So what if the cost of a roll of toilet paper jumps to $50? We'll just print more money so that there won't be poor people anymore.

Count Me Out

Mr. Baker has himself a nice strawman but little else. He points to federal infrastructure spending that hasn't taken place, jobs that have not been lost because of government intervention, and other smoke and mirror tactics to avoid the critical issue: government can only create government jobs. These jobs are not self-sustaining like private sector jobs but require tax dollars to fund them. More federal jobs means more tax burden on business who will scale back investment as tax burdens increase, thus shifting more economic activity into government hands.

Deeper problems exist though - we have today an economic collapse whose roots exist federal moetary policy and regulatory micro-management - and the solution employed by Obama & co. is the creation of a command economy under the distincly facist notion that government can do better. We're talking about vast swaths of GDP being run by the folks who brought you the IRS, the DMV and other bureaucratic black holes.

The ultimate question here is one of economic freedom. Government cannot create wealth while engaged in ever-expanding confiscatory wealth re-distribution schemes. Where does Mr. Baker think stimulus funds come from? Are these dollars simply conjured from the ether? Taxpayers are funding these programs but not on the basis of an economic choice predicated by what will bring the most efficient, profitable, beneficial results - those choices have been made by a congress beholden to grievance and interest groups. Nixon-era wage and price controls proved disastrous just as the enormous increase in federal spending will prove a disincentive to entrepreneurship critical to a recovery.

to Random: your assertion that economists have supported New-Deal policies as effective only until recent years is absurd on its face. See the contemporary writings of Albert Jay Nock, anything from Hayek or Milton Friedman.

Strategery

The federal government needs to take control of the economy, but so far, it has done so at the wrong place.

The Federal Reserve Bank, a private for-profit institution run by unidentified elite bankers are the ones that really have control over the economy, unemployment, inflation, money supply, and both political parties.

Until the US government takes back control of this central bank, as required by the constitution the US government, business and citizens will forever be slaves to debt on money that was created out of thin air. The federal income tax (on wages) started at the same time as the Federal Reserve Bank, and that is not a coincidence. Worse yet, the Federal Reserve helped start and fund every war the US entered over the last 100 years.

Mike Reardon

Nothing in either arguments reasoning goes to seeing the size of world liquidity stoppage that occurred. Japan's export driven economy had its GDP contract 14.4% in the 4Q of 2008, and this year's 1Q went down 15.2%. Neither argument goes to the roles played by the Fed and Treasury during the first months of that banking event. And the US has continued to add extra trillions of dollars backing numerous systems that were under stress, but here both only go to the smaller federal government backing and totally miss that larger picture. Today Treasury’s chief explained that the TARP payments are seen as revolving into the TARP account for Treasury to draw on.

Here is political bad guys the one side hates against the forces that never landed on any beach winning or losing a war that is not real. The massive supporting Treasury and Federal Reserve commitments into our market can't be seen in either position.

Massive liquidity has been put into the markets and only now is drawing in private investment that is bringing satiability. It's now a little early to push it out of the markets.

World depressions end with the major nations committing to military spending in massive races to arm against each other. Our military is already firmly in the national economy and even a Reagan standard of commitment to real hardware still can't support the whole world economy. But we can look for continuing health and pension reform to be a bridge to restart the whole economy and input labor out into the nation. That discussion of a real government commitment can't be found in pro or con positions.

The standard by Byron Schlomach, "I do not believe it will," is fitting if all we are is a Jamaican economy. Go ahead get the government out of the market now and match Japan's numbers on the way to the bottom.

Siva

Economy is akin to the freeway, though on the freeway there is a speed limit and traffic signals to regulate the traffic. And of course police to book the offenders. The economy, too, should have limits, regulators, and the law to book offenders.

sam

Deregulation turned the economy into a playground for white collar criminals.

The idea that a "free-market" system is self-correcting is obviously not true, unless you think that economic collapse is a good thing.

Gimme a BREAK

California is in 'it' very, very deep, having added so many former career welfare recipients to state, county, and city payrolls, with benefits: health care, retirement, taxpayer-funded cars and credit cards. If you think government is bankrupt now, give it 5 years. And Governor Swartazanothing, who can only read from a script, and refused to come clean with the people, is going to sell off California's crown jewels to the party faithful -- you know them as the socially prominent campaign contributors -- for less than chump change.

Fortune has a good piece on NJ going 'belly up' with all their broken promises of retirement and healthcare.....how long can/will the People bear the LUXURY of bush's and Congressional 'Guns AND Butter???' Safe from Al Qaeda? SAVE US FROM CORRUPT POLITICIANS slitting our economic and social throats.... from behind!

random

"...and the solution employed by Obama & co. is the creation of a command economy under the distincly facist [sic] notion that government can do better."

Yes, banks begging for government money and getting it is truly on par with Mussolini and the principles of fascism. Please let me know when Obama invades a bigger nation and participates in another set of Axis powers.

I swear, people today love to throw out -isms left and right, context be damned.

"your assertion that economists have supported New-Deal policies as effective only until recent years is absurd on its face."

Because you said so and cited three names of people who's writings were rediscovered by arch-conservative think tanks as soon as the banks started failing and Bush started handing out hundreds of billions left and right...

I can give you names of people who've asserted for decades before Erich von Däniken that humans were created from alien test tube experiments. It won't make their assertions correct. Likewise, because you say something, doesn't make it true. Arguments by assertion and well as appeals to authority are logical fallacies for a reason.

Count Me Out

"Yes, banks begging for government money and getting it is truly on par with Mussolini and the principles of fascism. Please let me know when Obama invades a bigger nation and participates in another set of Axis powers."

- Corporatism is clearly a foreign concept for Mr. Random. Banks can beg for, and receive, money in a facist state. Banks can also be forced to accept government control they neither desire nor need. The only real principal of facism is secular worship of the state, hardly an idea exclusive to Moussolini. Obama, and Bush before him, need not ally with axis powers and invade nations to behave in a facist manner. It is you, random, who have only a superficial understanding of the word.

"Because you said so and cited three names of people who’s writings were rediscovered by arch-conservative think tanks as soon as the banks started failing and Bush started handing out hundreds of billions left and right."

I took a college political science course over 25 years ago from a leftist professor who assigned readings from Nock in our examination of the New Deal. Your claim has no merit or basis in fact. Your assertion that criticism of the New Deal having prolonged or worsened the Great Depression being a novel idea is nonsense on stilts. I have made no assertions beyond pointing out that your "archconservative think tank" bit is a fantasy.

Mike Reardon

Byron Schlomach above reference to a 1998 Congressional Joint Economic Committee study on an optimal size of government involvement is missing the points that the derivative market in 1998 was $60 trillion and is now around $900 trillion, and that the nation's production and manufacturing wealth has over these 11 years been transferred into other world markets.

We are restructuring as a retail and service economy who needs to reestablish our own full domestic employment on a now services economy. There is nothing large enough to bring control to a unregulated black box financial market that was allowed to grow exponentially lager than the nation. Those 11 years were a transformation that now call for a greater supporting federal response to extend full employment.

Li Xiaolu

First of all, government is not controlling the economy, but it's a part of the economy. It comes into being from the economy. Government has two functions in market economy. One is protecting individuals' reasonable profits including of various people and organizations. For example, government can protect the intellectual property and when anyone else uses that without permission they will be punished by the government. Another function is protecting public profits--for example air, water, public resources, and environment. Without government, maybe we will live in a pile of garbage.
In the market economy, government has to intervene. Take American automobile market for example. The American automobile market is facing difficulties because of the economic crisis. They ask American government for help. Meanwhile American government has to help the automobile market for if it doesn't there will be a lot of problems emerging--unemployment, for example. So my point is: Government--stay in the economy.

Enrique

Right now government intervention works as a kind of morphine to easy the pain; the problem comes if the patient becomes addicted, as it happened after the Great Depression and World War II. The main cause of socialism has been always the Defense Department.

Carlyle Fonsworth

Sadly, no bailout money will ever be coming back. Fed is monetizing the Bush-Cheney-Gramm-Leach-Bliley deficits onto the back of SSTF. Essentially what they're doing is using our life savings in the form of debt on massive bailout deficits to prop up their artificial economy, which counts its own artifice as GDP, which we go along with to prop up our own 401(k)s so we can dodge taxes until we retire into the 60% tax rate required to pay interest-only on the bailout to pump up. Snake eats tail. Then throw $947 billion a year in CC&T taxes into the hair soup, and sink the boat.

Seeer

The government is in worse shape than the businesses it says it can fix.

The US should declare bankruptcy. It has a huge bloated, grossly over paid work force with huge pension and medical liabilities. It has become grossly inefficient and ineffective (Katrina, Iraq, secured borders, huge waste everywhere) an outdated product line most people hate. The US has a huge trade imbalance and is in debt up to its eyeballs. The US government in general is the only thing that actually makes GM look good. What's scary is that these are the same people that want to run the auto industry and the banking industry. With a proven record of failure, they shouldn't even be running a hot dog stand.

crossroadsteam

Government spending is one of the few things keeping our economy above water. Unless we can grow the private sector, we're going to become a socialist democracy. It doesn't help when banks, insurance companies, and auto manufacturers keep looking to Washington for bailouts due to poor performance.

Businesses of all shapes and sizes have to learn to fend for themselves and live with the consequences of their own decisions.

Craig

"As an economic system, fascism is socialism with a capitalist veneer."

http://www.econlib.org/library/Enc/Fascism.html

Andrew McKillop

The question is simple:

Are we going to get a hit of what I call "Petro Keynesian growth" driven by higher oil prices?

JKL

The role of the government is to create and maintain conditions conducive to private economic prosperity. In other words: The role of the government is to prevent the mess. If it could not even do that, it is unlikely that the government will be able to fix it now. Indeed, policies being undertaken are likely to create new problems of their own, such as the eccessive amount of debt, the debasing of the US dollar, the misallocation of resources resulting from propping up failed businesses at the expense of viable ones...

sam

The premise of the story is wrong because it repeats the myth that the government and the economy are two separate things. Public and private sector are two halves of one whole. Every dollar the government takes in taxes is spent, often creating revenue for those who rail against government.

kelly p

Soylent green is the answer.

kelly p

Like many other entrepeneurs, I can see clearly that going forward I will not be rewarded for my hard work or for placing my hard earned capital at risk. The national, state, and local governments now are raising taxes, creating mandates that increase the cost of employment, increasing the cost of capital and real estate investment, and all sorts of other redistributionist plans. Risk your capital and sweat if you like. We will sit this one out.

david russial

I believe this infusion of global liquidity was absolutely necessary to prevent a Great Depression II. Private sector demand dried up and the governments of the world needed to step in. It's as simple as that.

Ben Williams

To say that the increasing involvement of government in the economy is detrimental to our economic well-being is to state the obvious. It is disconcerting to me to see so many people who would read a publication like BusinessWeek defending this massive government intervention. Business people who favor this outrage do not deserve to be called "business people." They are just one more big government dependency group sucking the life blood of this country.

James H.

@ Ben Williams: Amen brother. Spoken like someone who actually understands what it means to earn something.

Screw government handouts. I'm a self-made businessman and since the United Socialist States of America doesn't actually have any money to lend, it is obviously planning on stealing money out of my pocket in the future. I detest what our government has become. Libertarian values need to be restored to make our government more efficient.

Marvin George

You have to remember the government was always in the economy, and for the problem the Bush Administration did, we are facing the problem. He allowed the communication of the US to go downhill so fast that we can't get out of our current problem. We don't have enough communication to handle the requirements of our society, and therefore the economy has to go down to a level where our economy can meet the needs of our communication system. All they cared about was mergers and nothing about keeping up with the requirements of our society. The President had to get into the act to force the tier one providers to upgrade the Internet to the major nodes as fast as possible in order to get the economy moving. There is no way out of this problem and the only things it will take time as we have eight years of downhill in the system and now reversing the course in our society. The bottom line what we say it shows that when a company doesn't want to do what it is mission is then it is the function of government to force it to do or generate a new company in order to do the job. The President is doing just that in forcing the massive increase in the Internet to the major nodes of the US. We are not talking to the last mile at all. This is another problem where studies have shown the cities Internet is so substandard that it would take billions of dollars to upgrade to what is required for our society. The ones that are now getting the Internet is rural America and will have a better communication then the cities have. The ISP that is putting this in is not cable or telecoms. This was the reason Verizon sold rural America business to Frontier because it couldn't compete with this ISP. They are also putting in VoIP and in the near future in rural America it will only be VoIP phone system period. There would not be enough customers to support land lines at all. Government had to get involved as the private system was not doing it's job and was leaving it to go down hill as the Bush Administration didn't care about the economy and the FCC didn't care about communication during this period. We are in restructuring of our whole economy as they allowed people to run our society that violated the social contract that I was taught when I got my MBA in 1971 from Pace University. They taught government would get into the act if this takes place and this is what is happening right now. In the case of the tier one providers the government is forcing to put in the capacity our society as fast as possible and they can't get people in Congress to stop it as they could before. They don't want to be tag that they want the economy to go down hill some more. They were the biggest lobby and found that the President has the power to force them to do the mission that they refused to do. It is costing them billions of dollars to bring the Internet up to the requirements that our society requires. You have to remember this was cause by the belief that companies would do their mission but we find out if it is monopoly type function then they don't want to do and leave things as the same. In case of giant companies they also left things the same and Bush was stopping any of the forces for change. The result is now the forces of change are starting to work and a lot of people will be hurt because of the fact the change will take place. The fact that our Internet will be brought up to the requirements of our society will find a lot of things change in our society and the old ways of doing business will be gone. This is why Netflix is moving to the Internet as it can get the bandwidth and the customer base to do it business. This is because one ISP gives true Internet which is constant bandwidth and TV and Internet are merging very fast for a lot of customers that are now getting broadband. These areas will be able to compete for work as they have high speed Internet and have a better communication system then most cities in the US. These are taking place without government help in money but the pressure of the President forcing the Internet to be upgraded to the major nodes. So in the long run our society will be completely changed over the next few years. The networks will have to change their operation to the Internet and also the major studios will also be forced to change to the Internet or go out of business. They can't stop the changes taking as it is going on faster then they expected in our society. If they say it will be in a few years then they will be gone period and there is nothing they can do. This will be the case in rural America as it will be on VoIP and no land lines will be used within the next couple years. All the current equipment and buildings for the equipment will have to be abandoned as there will be no need for them. They would have to sold as scrap the equipment. So you are seeing that if they don't keep up with the changes that society some company will come in and do the job which is what is happening in rural America right now and the current company will go out of business in the area. There would nothing that can be saved in the area. These are the rules of society if the government gets involved in making sure that the new can come in. Since this is a private company there was nothing they could to stop them and the President got them to get the needed bandwidth at the major nodes. The bottom line is society is changing in rural America and this may force change in the cities when they find what has happened in rural America and they want the same thing. So the bottom line no one can stop the new from coming in if the powers to be at the top want to happen as this President did and Bush didn't want at all. The changes at the network to the Internet is that they are seeing the tea leaves.

logic

How about asking a better question altogether? How is infinite growth possible in a finite world? It's not, of course.

GDP growth as a policy goal is an artifact of World War II government policy that carried into the Cold War as well. Now, it's no longer useful and is frankly harmful. There's a better economic paradigm that has been thought through for 30 years or so, the Steady State Economy, and for all our sakes I'm hoping it's embraced soon.

Clyde

We all need to quit working at our private sector jobs and erase our job skills since we cannot support the economy. Then we can be employed by the public sector. This will fix everything.

Paul Butterfield

Both writers miss the most central point of this debate: We can't afford government involvement. Government has already mortgaged our children's future with ballooning debt and is devaluing wealth with inflation.

norman ravitch

The nationalization of our economy had better be temporary--or else we will fall into the trap Europe has experienced: low growth, public demands upon the government, which owns so much of the economy, and a drift toward a form of socialism or state capitalism that is undesirable.

kelly p

Big O will make sure that interest rates stay low, stock prices stay high, gas prices never rise, inexpensive quality health care for everyone, no tax increase of any kind for anyone, but those evil rich, the sun will always shine and justice will always prevail. Cheer up.

John Cisco

I think this article is totaling missing the point. Why is there no emphasis on the fact that the institution that regulates monetary policy in the United States is "privately owned." This is correct, the Federal Reserve is owned by several banks of which most are European owned. They have the right to print money and "lend" it to the government. Like the $1 trillion that was printed up two weeks ago to erase toxic assets. Did you know that the government just assumed a new $1 trillion debt to do that?Do you know who is paying the interest on this new loan? The American taxpayer. Why can't the US government print its own money? Why didn't the government just lend the money directly to the people that needed the loans--the end consumer? The American taxpayer. Why is this not focused on? In Canada we have a central bank directed and owned by the government, not special interests. This central bank dictates financial policy. Have you heard of any Canadian bank needing bailout money even though they heavily invest in the US economy? No. A quick look on some of the arguments raised by Senator Ron Paul from Texas on youtube and other sites will clarify a lot of aspects about monetary policy that most of Businessweek's readers are deprived of.

Bill Odum

There is a statement that government does what the people can't. By now, it should be evident that the automotive, housing, and bank industries have botched what good business should be about; producing beneficial goods and services, and making a value driven profit. These industries were allowed to act without responsible regulation, and government failed in their responsibility to provide that. Preoccupation with a disastrous war was a contributing factor, a sad excuse. The trick now is to prop up these industries until reasonable rules and referee ranks are strengthened, and then get out. The Republicans would benefit the country by offering constructive criticism, and not acting like yapping armchair privates.

James H.

We messed up when we didn't elect Ron Paul. As far as I can tell, he was the only presidential candidate that had a clue and a clearly definable plan.

Carrie

As the pendulum swings back once again, the current administration "over" regulates business to comnpensate for "management" failures while handing out "stimulus" monies as a "reward" for failure.

Jesus Christ

There is a simple answer to all our problems. Stop overpopulating. The fewer people you have, the fewer problems you have. The more people you have, the more problems you have. So fewer is better. In 1973 the world's population was 3.9 billion people. In 2009 the world's population is 6.8 billion people. Experts predict that by the year 2050 the world's population will be 9.1 billion people. So our population is constantly increasing. We simply gain more people than we lose. When this happens you will overpopulate. All the problems of the world are due to over population. If we only had 1 billion people in the entire world, there would be no problems. So I suggest to the entire world to stop creating and tell your children when they grow up not to create. If you don't, then your future generations are headed for a total disaster. Spread this message to the entire world. JC

Alton E. Drew

Government has a role in managing the economy just by the very nature of government (as an enforcer of contractual and property rights) and by law (The Employment Act of 1946 and Humphrey Hawkins Act of 1978). The problem is when government steps into the management affairs of industry with the most recent example being the affairs of automakers General Motors and Chrysler. Private enterprise is and should continue to be the manager of commerce. Private enterprise best understands the efficient use of labor and capital. As seen by the Administration's desire for General Motors to become Green Motors and build "girlie cars" for a nation that demands speed and size is a blatant example of government's penchant to look at the political bottomline as opposed to the financial bottomline.

Alton E. Drew
www.altondrew.com

Yanming Li

I think the government should take a limited role in the economy, which will eliminate the negative aspects of capitalism while adopting the positiveness of socialism. This would benefit the economy in a variety of ways. First, a government intervention protects the consumers, producers, and the community as a whole. Second, limited government involvement prevents crises such as inflation, unemployment and depression. such as President Obama's recovery package; it can stimulate the economy and invest the money into the area that will benefit the whole nation most.

Hartmut Rast

During the recession in the mid 1970s, European governments thought Keynes was the only clever man around and they followed his recommendations about deficit spending. They had been so eager in throwing the money out of the window that they hadn't had the time to read his books till the end, and now we have an incredible indebtedness nobody knows how to get rid of (hopefully not with inflation or bancruptcy of states). However, as we can see now, the current measures to smooth the present crisis have failed too. Germany has spent 87 bn Euros to stabilize the building sector and it declined by around 17% in the first quarter.

I am very surprised about the ongoing debates in the U.S. and see them as rather helpless actions without even knowing what ought to be the result in the end. I am wondering if all the bailouts and picking up GM is the first step into more socialism in the United States and a farewell to capitalism of the old days?
--Hartmut Rast, London

FOOK OFF

I can't wait until Bloomberg takes control of this magazine and web site!

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