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A few thoughts about the limitations of government

In this post:

A few thoughts about the limitations of government
Our founding fathers
How large should government be?
How policy helps frame the debate
Where we are headed

In a recent post, “Stop the madness now!” I voiced my growing concern with the direction in which the country is headed. I am not alone in my anxiety. Despite recent improvements in the economy, most recent polls show that Americans are more alarmed now than they were early in the year when things looked rather bleak. While these concerns have manifested themselves in various ways depending in large part on political affiliation, it is clear much of the worry centers on jobs – or the lack thereof.

Policy makers have been ‘wildly’ successful in stabilizing the economy in the U.S. and elsewhere. Given the enormity of the financial crisis, it is unrealistic to have expected a far better economic situation than the present one. Nevertheless, disenchantment with the economic direction has reached a fever pitch and put the Obama Administration on its back foot.

In my view, this is not just because the economy remains weak. Americans are angry because the economic policies used to try to fix our predicament have been both unfair and opaque. They have favored special interests like big banks and much of the maneuvering has been done in secret. All of this has increased distrust of government and weakened the Obama Administration.

The result of the increasing distrust of government has been a renewed questioning of the role and limitation of government in the American economy.

When thinking about government and its role and size, there are three camps of thought.

  1. Big Government. Supporters of big government believe that government can do good. In this view, an increase in the size of government is not just warranted but necessary in a severe economic downturn in order to fill the void left by the private sector’s fragility. The large scale fiscal stimulus enacted in 2001 at the beginning of President Bush’s first term, in 2008 at the tail end of the Bush Administration, and in 2009 during the Obama Administration are examples of Big Government in action.
  2. Limited Government. People in this camp believe that government must always be held in check – even in times of economic distress. If not, a self-perpetuating bureaucracy develops, with a cadre of individuals dependent on government and wedded to institutions or programs which no longer have great value. In this view, expanding government is like moving to into bigger house;  the new space must be filled with stuff, with size justifying the need for possessions rather than the need for space justifying the size.
  3. Small Government. Individuals in this camp see government as a parasite which, while necessary in small measure, always and everywhere raises the specter of despotism and cronyism. In this view, government must be kept as small (and as local) as possible because it feeds on society and on power to usurp property and wealth for its own use and that of its cronies.

Our founding fathers

The United States were founded by individuals who were distrustful of government, many looking to escape tyranny, taxes and religious persecution. The founding fathers were largely in the limited government camp, with many falling into the third small government group. We need look no further than the U.S. Constitution for evidence of this instinctive distrust of government.

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense,[1] promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

This preamble to the Constitution is a statement of purpose. It is the answer as to why the U.S exists. It answers:

  1. who established the government: "We the People" (back then, white tax-paying citizens; now all women and men)
  2. for what purpose we established the government: "to form a more perfect union…. and secure the Blessings of Liberty"; and
  3. who benefits from this action: "ourselves and our Posterity."

The specific words were chosen carefully. The word liberty is central to this statement. Merriam-Webster describes liberty like this:

the quality or state of being free: a : the power to do as one pleases b : freedom from physical restraint c : freedom from arbitrary or despotic control d : the positive enjoyment of various social, political, or economic rights and privileges e : the power of choice.

Then there is "our Posterity" i.e. our children, children’s children and their descendants and other future citizens. They are to be a chief beneficiary of government action.

I would describe this as a document affirming great respect for individual liberty but cognizant of the need to sacrifice some individual liberty for a sustainable long-term future. You and I both know this document is more of a goal than a reality. After all, slavery was permitted in the United States until nearly 100 years later. Native Americans were persecuted and slaughtered for decades. And women were refused a vote until the early 20th century.  So, as far as execution goes, you have a few problems. The idea, on the other hand, is terrific. I consider that idea Libertarian.

To this day, Americans have a Libertarian bent and are more distrustful of power, elites, and government than many in Western Europe and elsewhere.

How large should government be?

It is with this ethos as background that most are taking in the debate about the size of government. I would argue that most Americans today are in the middle group (where I also see myself) – wary of big government but receptive to the need for more government in times of national emergency. These people were swayed toward Big Government because of a deep downturn and financial crisis but crony capitalism and bailout fatigue have discredited Big Government. And now we are witnessing a war about the proper role of government. Perceptions of recent policy decisions remain top of mind in the process.

At about this time last year, I wrote a post called “A brief philosophical argument about the role of government, stimulus and recession” which outlined how I saw the role of government.

I said:

Government, by its very existence, is always redistributive. Therefore, a key role of government is to redistribute income. This statement is self-evident to some, but provocative to many. So let me explain why this is so.

Most reasonable people would agree that a large society requires government to maintain order, provide basic services and assemble military defenses. These are all considered basic roles of government. However, to take on these roles, government requires funding and this means taxation. Now, taxes, by their very nature, are redistributive. Levying a tax on one person or one good takes money away from that person or that business and puts it in to the common pot. This is the definition of redistribution. Government cannot function without taxes and taxes are by their very nature a redistribution of income from some agents to others. Therefore, government is a naturally redistributive agent.

To my mind, the redistributive nature of government is obvious. In fact, it struck me as extremely disingenuous during the U.S. election this past year when John McCain led the Republican Party in admonishing Barack Obama for suggesting he was going to “spread the wealth” — as if that’s not axiomatic.

The real question is this: Because government must tax to maintain its existence and this tax will redistribute monies from some agents to others, what are our priorities as a people as to how that redistribution should take place? Who should we tax, by what means and by how much? And who should receive the benefits of those taxes and for what purposes? These are questions actually worthy of debate and are fundamental to democracy.

My answer is fairly simplistic: how we tax and how we spend government money depends on the economic, political and military situation, on the wisdom of our leaders and on the priorities of the people. There is no ideological answer to this question. One problem I have with the small government crowd is the ideological view that the answer must always be the same regardless of the circumstances we face. I certainly believe very much in limited government. I think most people would label me a Libertarian or a fiscal conservative. However, I am not ideological. I am pragmatic and I believe public policy must adjust to the specific requirements of the time.

This is still my thinking today. We need a balanced and non-ideological approach, cognizant of the economic situation. That means that we have needed fiscal stimulus to fill the void brought about by this crisis. But we cannot allow government ‘creep’ or we risk setting up a whole new and unnecessary apparatus of government that diminishes our wealth over the long haul.

How policy helps frame the debate

Nevertheless, my thinking has changed in some ways since late last year – along with many Americans.

Barack Obama has been handed one of the worst legacies since Franklin Roosevelt. When he entered office, we had two wars, a financial crisis, a deep economic downturn, and numerous bailouts already in progress. Combine that with his own agenda for substantive change on health care and the environment, issues that many of his supporters felt were stymied during the Bush years, and you have a Herculean task for any person. Back in January Warren Buffet said not to expect miracles from Barack Obama because many of his supporters seemed to believe he could do it all – and with instantaneous positive results.

I don’t expect instantaneous results. I expect a decade-long struggle for the United States because stimulus is no panacea for all of our problems. My expectation of a long road ahead is a principal reason I am concerned about Obama’s newfound role as deficit hawk.

Barack Obama did campaign as “change you can believe in.” However, all I have seen so far is more of the same:

This is not the change that many of us expected. I am skeptical enough that I certainly anticipated some of this. But I am surprised at how little interest President Obama has shown in ending these practices. And I suspect most Americans are as well.

Contrast this special treatment for special interests with the more ordinary treatment for ordinary Americans:

Where are the homeowners bailout packages? Where are the unemployed’s bailout packages?  Not that I am advocating bailouts; I am not. I am simply pointing out that the too big to fail banks and automakers got bailouts while ordinary Americans received next to nothing.

Now most people don’t write a finance blog with statistics and 100 different stories to rattle off about the big squander on how all of this is grossly unfair, how this is a fake recovery from which they are not benefitting but from which banks are benefitting. But people aren’t stupid, they know they are being looted. And this makes them lose faith in government.

I find it ironic that the panic which precipitated the acute phase of this crisis was caused by a loss of trust in banks by the people and banks in each other. The government told us they would fix them and we trusted they would.  They certainly stabilized the economy but at great cost and in an enormously unfair manner. So when New York Times columnist David Brooks runs a victory lap for the Administration telling us what Geithner got right, I laugh at how misguided these arguments are. It is not a question of whether the Administration has stabilized the economy, it is the way they did so.

Those in the third group I mentioned at the outset – those who support small government -  they are saying, “I told you so.” At this point in time, I have no retort.

Where we are headed

So, to those who say,” give him the President a chance – he has only been in office 10 months,” I say that is long enough to know. The President’s task is to lead irrespective of the circumstance. And despite the limitations of his office, national emergency or economic circumstance, he is the one who is expected set the tone for our nation’s policy agenda and to decide which issues we prioritize as a nation.

Fairly or not, every President is measured based on his ability to do so while improving the nation’s economic lot. And the lot of ordinary Americans is no better; it is worse. Meanwhile it is business as usual on Wall Street and in the corridors of high finance.

So I say, “stop the madness.” I still back targeted stimulus for jobs. But, despite the calls by the Krugmans of the world for yet more stimulus of the full tilt variety, this is all I want. I am less confident of government.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

13 Comments

  1. Sobers says:

    You in the USA are discovering, like we in Europe have done in the past, what happens when the majority can vote for spending they will not have to pay for. We in Europe are now in the situation that no govt will EVER reduce the role of the State because it cannot get the majority of votes neccessary to do so. There are too many people attached to the State teat. You in America may not be past the point of no return, but you’re getting closer all the time.

    The irony is that, just as if you indulge a child now, you set them up for failure in later life, the current profligacy will result in penury for the mass population at some later point. Electorates cannot continue to vote themselves more and more public spending indefinitely. At some point the debts get so large they cannot be repaid, the currency is debauched or destroyed and the population impoverished.

    It’s Ponzi type scheme – as long as you can shovel the debt in at one end, the standard of living can be maintained at the other. If the debt source fails the house of cards falls. Such a ruin can take decades, even a century or more. You could live your entire life and not see it fall. But I suspect the end is approaching for several countries, the USA and the UK being prime candidates, with Japan not far behind, due to its high debt level and declining population.

    • Potomac Oracle says:

      Debt financing is not the only way to fund budgets. The Colonists used Scrip, Abraham Lincoln used interest free Greenbacks, JFK attempted to use interest free Silver Certificates.

      Nations become victims of the Ponzi scheme for the reasons you mention, it’s the popular and profitable thing to do in the short run. However, no nation needs a central bank charging it interest on fiat money. Governments can generate fiat money absent the central bank and reap the benefits of debt free currency. Inflation during the period 1862-65 was primarily a function of war, and most of the inflation was due to currency created by the Confederacy. Today, inflation can be avoided by regulating fractional reserve lending and tying the supply of money to accepted growth ratios. Debt can be monetized when redeemed debt instruments are not rolled over as is current practice, but instead liquidated so that all that remains is the original amount of liquidity, rather than it plus the debt instruments.

      There is a way out, we just need to be creative, and courageous enough to challenge the bond and stock holders of the worlds central banks. They rely upon interest on fiat money to sustain their plutacracy.

  2. demandside says:

    It seems to me that government needs to be big in the sense of control and structure markets, big in scope, but not necessarily big in bureaucracy. One of the examples might be the Consumer Financial Protection Agency, which describes the type of products that can be sold and bought and perhaps the conditions. This seems likely to have a very much small staff requirement than an intrusive super-regulator looking at all the books and practices and so on.

    Structuring markets in other ways, like, for example, getting the too big to fails back down to a size that is susceptible to market discipline is a bigness that is not an intrusiveness, and is much more amenable to healthy economics.

  3. Scott says:

    Just coming from the anti-fed camp, your analysis is all and well, but please acknowledge the difference from an explicit tax like sales tax and payroll taxes from an implicit tax like inflation. One we understand, and one we have trouble comprehending, hence increased distrust. It does not help feeling powerless against deficit spending and inflation when we still can understand voting for a .01 percent increase in the sales tax to pay for a homeless shelter or a bond issue to build a bridge which are usually placed on our local ballots. One’s our decision and one is not.

  4. Pat says:

    Never are there any polls between government employees and private employees as to employee benefits, incomes, pensions, etc., and in a nation that operates by information, this would be expected to be one of the first polls done – for government effectiveness as well as to ascertain how well government performs for private citizens, or for small and medium size businesses, the bulk of resources for government and without force, the usual source of income for government through taxation.
    When government hoards what little funds there are in taxes, and depends upon lifetime employment to maintain that status, it leaves little space for productivity to operate, or to provide for national growth. Hoarding in any industry has always led to the monopolization of benefits and inevitably to an oligarchy reserve by the few but forced upon the many. Enslavement is no way to run a country, even for government officials. From a power perspective, it can be nothing but an abuse of power – for democracies.

  5. ep3 says:

    i think obama’s plan all along has been to discredit gov’t so that he can finish dismantling the social safety net. Especially with social security, i think the elites thought their failure with Bush’s privatizing of SS was his lack of popularity and prose. with Obama, he can tell us he’s turning all our SS over to wall street then flash a smile and we just calmly turn around and bend over.
    but back to my first point. i think his plans have been to “pretend” to be this big gov’t socialist president and pretend to do these big gov’t things so that it drives up the distrust in the gov’t (which it has done) and that facilitates the dismantling of the rest of the safety net AND it opens up unlimited corporate power.