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.
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.
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