Does Government Matter?

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The American government’s struggle to reduce unemployment has further exposed its waning influence. Washington is divided between those who say the Obama Administration’s $800 billion stimulus of February 2009 was excessive and those who say the U.S. did not spend enough. Either way, the unemployment rate remains stuck above 9 percent, with underemployment and part-time employment rates significantly worse. Supporters of the stimulus package assert that without it, unemployment would have been even more dire, and they may be right. The fact remains, however, that over the past two and a half years, government efforts to move employment trends have come to naught.

Indeed, the only thing government has been able to do about the jobless problem is to hire people. Without government hiring in the past two decades (which accounted for about a quarter of all new jobs between 1990 and 2008), the unemployment rate in the U.S. would have been considerably higher. But direct government hiring is hardly an indication of government’s ability to affect market employment trends.

So what’s going on? Why is it that even aggressive government action has such little effect on the country’s economic fortunes, in either a positive or negative direction? In recent decades, the demise of capital controls has accelerated the rise of global bond markets and eroded the ability of governments to determine the value of their own currencies. That, in turn, has undermined their capacity to steer their economies. Meanwhile, global employment trends, such as the relocation of low-cost manufacturing to the developing world and the wide dispersal of supply chains, has meant that there’s vanishingly little that policy makers can do to create jobs for their citizens.

These dilemmas aren’t confined to Washington. The European Union is the world’s largest example of states’ voluntarily renouncing sovereignty over their economies. But that has tied the hands of the Greek government in addressing the structural defects that contributed to its current debt crisis. The Greeks can’t control their currency or their domestic cost of capital. They can slash spending, but it’s a blunt instrument that does nothing to make their economy more productive and functional. Even in China, whose growth has been driven by massive state intervention, the eclipse of government is inevitable. With every further move to loosen capital controls and promote private entrepreneurship, Beijing moves down a path that gives global markets more sway.

What, then, can nations and their officials actually do? The ecosystem of global capital, in which trillions of dollars, goods, and services are traded daily, transcends the reach of any one government. That doesn’t mean the U.S. can or should walk away from its obligations to pay off creditors. It does suggest, however, that even if Washington finds some elusive formula on debt and spending that all parties can agree on, the structural challenges standing in the way of economic growth—from unemployment to foreign competition—will remain. Governments are essential in moments of crisis, and they retain the unique capacity to channel collective resources, promote research and development, set social priorities, and create incentives for the private sector. But they are no longer the principal actor in the drama.

For this July 4th, we could do with a new credo: Government is neither the solution to our problems nor the cause of our ills. It is as much a mistake to blame Washington for the current U.S. economic malaise as it is to expect Washington to relieve it. The government is one vital element among many, and society will thrive only when neither too much nor too little is expected of it. This may not be as stirring as revolutions and crusades, but it’s better to accept limitations and work constructively within them than pin our hopes on policies—such as the massive attempts to juice consumption that the U.S. government has repeatedly tried—that are bound to disappoint. Bold plans with no chance of success won’t change employment patterns or make a nation competitive and compelling in a global system that is increasingly complex and dynamic. Today’s leaders need the humility to recognize what they can’t change so that they can meaningfully change what they can.

Karabell is a Bloomberg Businessweek contributor.