Government Grows the Economy

 

 

 

Economist Jeff Madrick, director of policy research at The New School’s Bernard Schwartz Center for Economic Policy Analysis, is among several key speakers at next week’s Building the New Economy conference here in Washington, D.C. AFL-CIO President Richard Trumka and United Steelworkers President Leo Gerard also are among keynote speakers. Here, Madrick shares with us why government involvement in the economy is essential to ensure a robust, successful ...

nation.

America had been living a free-market myth for a generation until the credit crisis of 2008 and 2009 descended on the nation—and the world.  One expression of that myth, found frequently on the editorial pages of the popular media, was that government does not grow economies, business does. In other words, government, don’t meddle where you’re not needed.  Politicians are even easier to belittle than government itself.

I have spent much of my professional life making the opposite point. Government does indeed grow economies. It creates jobs and it produces prosperity. When politicians make correct decisions, they indeed make economies grow. There is no example of a major rich nation in the world whose government does not:

Educate its children and teenagers.

Build its roads, bridges, superhighways and airports.

Establish regulatory bodies to minimize financial busts.

Develop sanitation and water systems and health care standards.

Support those who are temporarily unemployed.

Provide a public pension to the elderly and a subsidy to the poor.

This is the call of big government. Label it proportional government if the words “big government” bother you. It is people getting together to do what they believe they must. And, yes, this is what good politicians do. Let’s call it like it is.

As economies grow larger, societies more populous, scientific and social knowledge deeper, and interconnections more complex, government grows as well—at least in societies that succeed. And when government works as it should, it is also typically the leading agent of change. As economies progress, societies learn more, and expectations rise, government’s main purpose is to manage, foster and adapt to this change. It is a profound task.

Our own government has a history of managing and adapting, often radically, to change, looking ahead, not backward. It did so in the face of influential forces, fearing the future and aiming to protect established interests, which invariably opposed new obligations for government: financing the canals in the 1820s, building free primary schools starting in the 1830s and high schools in the late 1800s. In the early 1900s, our government developed government-built sanitation and water systems that made the cities possible; created a central bank to mitigate the disruption of boom-and-bust cycles and regulate unstable financial markets; and enforced labor rights such as hours worked, job safety and a minimum wage.

All myths are by definition simplistic. The one that became entrenched in the late 1970s and early 1980s had as its core claim that government’s presence was usually an impediment to prosperity and that the best course for the U.S. economy was to reduce aggressively government’s size and reach. So popular was this destructive notion that the end of the “era of big government” was announced proudly in 1996 by a Democratic president, Bill Clinton. 

In the past 30 years, government, with a few exceptions, did not adequately sustain and nurture society or help it adapt to change. Government invested less in America, it regulated less, and it led less. It was a lost generation.

The financial crisis occurred because of this widespread disdain for and distrust of government. Under ideological pressure to which both political parties subscribed and under the influence of powerful vested interests, government stepped back and gave financial markets largely free rein. Very risky investments were made with enormous levels of debt—the failure of one firm could take down an entire industry. Common sense was discarded and new, highfalutin theories about the rationality and efficiency of markets dominated thinking at the best universities, the halls of Congress and the boardroom of the nation’s central bank. Always, the argument was the financial community understood risk better than any government could. 

When you comb the serious academic evidence about how and why economies grow, you will find that no case can be made that big government or even high taxes impede economic growth over time. History offers no lesson about the values of minimal government. There has never been a laissez-faire modern economy. To the contrary, the evidence shows that government typically contributed vitally to growth. As odd as it is to have to say this, without effective government, America would be poor today.

The lost faith in government has detrimentally affected almost all aspects of life in America in the past generation: health care, education, retirement security, the quality and durability of jobs, family time available to raise children, rising prison populations and the nation’s wealth itself.

Government is not always good. It requires vigilance and weeding. But it also requires the confidence and understanding of its people. These it must earn, but the people in turn also must learn their own history, free of ideological cant and petty anger.

The major question today is whether the deep setbacks caused by the credit crisis will awaken the nation to the need to revitalize government again. If America returns to the norms of the past 30 years, the nation will not succeed.

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