The Era of Ever Bigger Government is Over

Right now the American Left is terrified that Congress might actually take steps to bring our budget deficits under control. Even if taxes are raised that would mean shrinking the size of government, and "left" means nothing in politics if it doesn't mean bigger government. Their argument is that more government spending is necessary to remedy the economic problems we currently suffer.

Robert Samuelson shows what is wrong with this.

Nowadays, all we hear are warnings not to repeat Japan's mistakes that resulted in a "lost decade" of economic growth. Japan's cardinal sins, we're told, were skimping on economic "stimulus" and permitting paralyzing "deflation" (falling prices). People postponed buying, because they expected prices to go lower. That's the conventional wisdom -- and it's wrong.

Just the opposite is true: Japan's economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that's been missing in Japan. This is a lesson we should heed.

The Japanese economy rode high for a long time on a vigorous export sector backed by the Government, while the domestic economy remained weak. When the real estate bubble collapsed in the 1990's the result was brutal. The government tried to spend its way out of trouble. It didn't work.

Although the Japanese reacted slowly, they adopted the advice of economics textbooks. They raised spending, cut taxes and let budget deficits balloon. Gross government debt soared from 63 percent of the economy (gross domestic product) in 1991 to 101 percent of GDP by 1997. It's now around 200 percent. The Bank of Japan (their Federal Reserve) cut interest rates, going to zero in 1999 -- a policy that, with some slight interruptions, endures. Despite massive stimulus, rapid growth hasn't resumed two decades later.

Perhaps a more telling bit of information comes by way of Anne Applebaum at Slate.

Throw your Euro stereotypes out the window: Last weekend, a Greek government that has cut public-sector pay and lowered pensions won a clear victory in local elections…

Nor are the Greeks alone. Last month, voters re-elected a Latvian government that cut public-sector workers' pay by 50 percent. The British government coalition, which is also trying to eliminate benefits and cut spending, remains strangely popular, too. Although—contrary to my previous observation—London witnessed its first Continental-style, anti-austerity riot last week, there wasn't much general enthusiasm for the protesters.

It's saying too much to call it a pattern, and it may well not be a permanent change: I'm sure there are plenty of European politicians who won't survive their next encounter with the voters. But there is something in the air. It almost seems as if at least a few Europeans have actually drawn some lessons from the recent recession and accompanying turbulence in the bond markets. They have realized, or are about to realize, that their state sectors are too big. They are about to discover that their public spending, which seemed justified in good economic times, has to be cut. The middle class knows in its heart of hearts that its subsidies, whether for mortgages, university tuition, or even health care, can't last.

I'll believe this movement is for real when I see Jerry Brown implement it in California. It does seem that the trajectory of government growth ever upwards over the last century in developed nations is destined to turn downward, one way or another.

One solution to our problem is simple. All government programs are financed by taking a share of the productive economy. When government programs like public pension funds respond only to demand without adjusting for supply, those programs eat into the capital available for production. That's cooking and eating the goose that lays the golden eggs. All pensions and all similar programs need to be redesigned to respond to the supply. Applebaum has this:

I've described this mood swing before, but two American economists, Douglas Besharov and Douglas Call, recently substantiated it in the Wilson Quarterly. They write that most developed countries in Europe and Asia—not some, most—are moving, "however hesitantly," toward market-based government pension and health care systems, at least for the middle class. Most now fund future pensions with investment funds and stock holdings, either instead of or in addition to pay-as-you-go plans. Even countries historically suspicious of the free market—such as Italy, Sweden, and Poland—now use such schemes.

Market-based systems pay out big when the economy is growing and not so big when it is not. That is what responsible economics looks like.

The other solution is more problematic. Samuelson identifies it:

Economic success ultimately depends on private firms. The American economy is more resilient and flexible than Japan's. But that's a low standard. Neither the White House nor Congress seems to understand that growing regulatory burdens and policy uncertainties undermine business confidence and the willingness to expand. Unless that changes, our mediocre recovery may mimic Japan's.

Government needs to promote a flexible and dynamic private sector in which new firms can be created at a minimal cost. Above all it needs to remove barriers to entrepreneurship and avoid trying to pick winners and losers. Those guys building the next great firm in their garage are the real golden geese.

Comments

[Donald Pay]

I disagree strongly with you lede, and much of the rest of the piece is piffle.

While the left doesn't get bothered by moderate government deficits and some debt, it sees the profligate government spending, such as those by the Republicans since Reagan, as something that needs to be controlled. What you spend money on makes a difference. Republicans spend in order to pay off the special interests, and buy votes. The left would spend to build infrastructure.

And you have to look at circumstances. Like many economists, Samuelson makes blanket statements. The key is, and you stated it in one quote from Samuelson, "...Japan reacted slowly...." It let the slide keep sliding until it was too late. Depressions and near depressions are not a time for timid behavior, and it was the inability of government to operate in its proper role that caused the lost decade. Samuelson learned the exact wrong lesson.

[George Mason]

What happened to produce Japans lost decade fits right into Donalds favorite meme. Japan's government was corporatist to an extreme. The government favored only the largest industries and had a great deal of control over how exports were priced (and of course they were quite protectionist).The government ensured there was no incentive for entrepreneurs. As a result investment in innovation and the employment it could create were stifled. This of course favored the conglomerates by limiting competition for both products and employees. As with all government directed economies it stagnated and then declined. Denmark and Sweden saw the writing on the wall in the early 2000's and started incrementally disassembling of their welfare state's. Whether this will bring manufacturing jobs back to Scandinavia remains to be seen. The costs of creating jobs has to be reduced to the point where hiring someone will profit the business, and the government cannot be competing with business for available money. It appears Greece, Portugal and the UK are facing up to this.

[Miranda]

Donald: One can hardly place all of the blame for these increases in spending on The Republicans. Surely The Democrats, who controlled the House under Reagan, both houses under George H. W. Bush and both houses again (albeit for a shorter time) under George W. Bush, have some share in the guilt.

That is not to say that Republicans have been angels of conservatism, but did the Democrats ever propose any significant spending cuts during their years of control?
If they did, I have forgotten it.

[Donald Pay]

I can't speak for all Democrats. I think the Blue Dog Democrats and the Republicans have spent a lot on misplaced tax and trade policy, unnecessary wars and defense, pork projects, bailouts and what I call 20th century infrustructure (payoffs and subsidies to old industry).

I'm more interested in the future. Getting rid of earmarks is just a beginning. Total earmarks come to less than one percent of the budget. I like the cuts I see in the Green Scissors program, though I quibble with a few.

I hope we can all agree that states like South Dakota need to start paying their own way and be less dependent on federal handouts.

[duggersd]

Donald, I agree states such as SD need to pay more of their own way. There are also some other places to cut the federal government.
I bet Green Scissors did not mention the bloated budget of the EPA that had an increase of either 124% or 35% depending upon which figures you use over the past year.
Stopping earmarks is symbolic, but it is a good symbol. If it is good enough for US dollars to be spent on, it is good enough to go through the budget process.
I believe there is waste in the Defense Department as well. This is beyond the cost of two wars.
I think the government could quit buying things like grains, meats and cheeses as supplements to farmers and food producers.
Health care is another place for cutting. Perhaps if people actually paid for some of their own health care the cost would go down.
We could quit giving tax incentives to purchase things like the Volt and the 220 volt plug in adapter.
We could sell GM stock.
We could freeze government civilian pay and tell each department they have to cut 5% of their employees.
We could abolish the Department of Education. Local control and local taxes would go a lot farther with no federal strings attached.

[larry kurtz]

I gotta disagree with you, too, Doc.

At a time when China is moving toward super-power status it seems increasingly prudent to consider merging several countries into one mega-power capable of exerting quieting strength over a burgeoning economic megalith under one President and one Congress.

ip is not a New World Order guy, does not support the North American Union (god bless you please, Mr. Roddenberry) and believes that the US Constitution is a big enough canvas in order to paint a more perfect masterpiece, a big enough score for all to sing. No violence. No more drug wars.

It's time for all Americans to enjoy the protection of law by being part of one nation: erase the artificial borders and grant Life, Liberty and the Pursuit of Happiness to all the people of North America...Mexico, Central America, Canada, even the Caribbean if they'll have us.

[George Mason]

Dugger; You have a good start. The largest cost in government as it is in business is employees. The federal government needs to pare the payroll in non-military employees. Federal employees in non-military jobs need to work until they are 65 (70 would be better considering the ever extending life span). This full pension after 30 years is fiscally and economically insane. The best move would be to eliminate the non-military federal pensions all together and let them pay into SS and create 401K investments like the people who pay their salaries. Eligibility for military pensions should be raised to 30 years service. The best method to attain more intelligent policy is to pass a law that no Congressman or Senator shall be paid more than the average American taxpayer.

[Donald Pay]

I hope Republican Representatives and Senators will help cut the federal budget by no signing up for their taxpayer funded government controlled health care. If Republicans are really intent on repealing health care for real Americans, it might behoove them to refuse their government controlled health care plans. Instead, it appears some of them are incensed that their taxpayer subsidized plans don't kick in sooner.

http://www.politico.com/news/stories/1110/45256.html

[Miranda]

Donald: And during this time, when the Blue Dog Democrats and Republicans were spending all of our money, what were the true liberal Democrats doing? Plotting out spending cuts?

[Donald Pay]

Progressives view a lot of government programs and activities as harmful or wasteful, and have offered changes to programs or outright cuts. The entire Iraq war was a total waste of resources. There are lots of areas progressives would cut. I've followed the Green Scissors prgram for 15 years during which environmentalists have been offerring targeted budget cuts to wasteful programs. The current Green Scissors plan targets $200 billion in spending.

http://www.greenbiz.com/sites/default/files/GreenScissors2010.pdf

[Jimi]

Donald says, "The entire Iraq war was a total waste of resources."

It will be many years before anyone will ever know if The Iraq War was a waist.

Donald says, "The left would spend to build infrastructure."

Total Stimulus equals about 1.12 Trillion so far including the $862 Billion ARRA. Republicans got no say whatsoever in the Packages, but Democrats offered their own tax cuts & incentives, mainly for political reasons and political cover. Most of all the tax incentives have already expired, and the tax cuts were not substantial. Only 45% of the money has been commited so far, and only about 15% of the total will go to any infrastruture spending. So the Left has had their chance to do massive infrastructure spending, but chose not to do it on their own.

[Donald Pay]

I'm tired of the misinformation and whining. The Republicans largely absented themselves from the stimulus, but the ARRA did include Republican ideas. They suggested several of the tax cuts that you criticised. Maybe you are one of the 5% richest Americans who didn't receive a tax cut through the ARRA, but the rest of us did. I was never a big fan of tax cuts, because in a deep economic slide many people pocket that money or pay down debt, rather than spend. This is understandable (and something that economists had warned would happen), but the tax cuts, therefore, did not stimulate the economy. This ought to be a warning to us about the largely discredited Republican ideas about tax cuts.

Second, you criticise the paltry amount going to infrustructure. So do I, but we can thank Republicans for that. They demanded that the bulk of money go to tax cuts, which you and I both agree did not do the trick.

Third, the Iraq war is worse than a waste. Getting rid of Saddam was a positive, but it strengthened Iran's position. Iran is a far greater threat to regional and international peace and security.

[Miranda]

Donald: The Democrats in congress voted for the Iraq War legislation 29 to 21. And while some have spoken out against the war, I never saw them try to cut its funding
Ironically, Democrat leaders are actually trying to pass a bill that would increase war funding:
http://politicalticker.blogs.cnn.com/2010/07/19/senate-democrats-say-house-must-cut-teachers-money-from-war-spending-bill/

The link you provide is interesting and there are a number of cuts I agree ought to be made in it. But there is no sign in this article that any congressional Democrats support "Green Scissors" or have made any move to actually cut these programs.

So! My question to you is this: Which congressional Democrats have actually used their seats to cut spending significantly?

[Jimi]

Donald says, "They demanded that the bulk of money go to tax cuts, which you and I both agree did not do the trick."

The Bulk of the money did not go to tax cuts...only $200 Billion went toward tax cuts and incentives. The incentives have already expired, and the tax cuts have strings attached. You need to provide some evidence of Republicans getting what they wanted as far as the tax cuts in the ARRA, because as of right now, you are the only one I know of that believes that talking point.

Donald says, "Iran is a far greater threat to regional and international peace and security."

You can't deal with Iran unless your in Iraq. Afghanistan is Land-Locked and is not a strategic objective for the confrontation with Iran. Being in Afghanistan only serves the purpose of helping hold together the Pakistani Government. The Persian Gulf is one of the most strategic objectives on the planet. In terms of Military manuvers, the United States infiltration into the Middle East by digging in on Iraqi soil will go down as the most fruit bearing manuvers in American Military History, and GDub will be rewarded handsomely for having the guts to make that decision. The securatization of Middle East Oil with American Military Power is stategic in terms of national security, and puts Iran on a timeline to compromise, because we will hold the strategic advantage of controling the Persian Gulf and the entire Western border of Iran.

[William]

George,

Many people still believe that newly hired Federal employees are on the old Civil Service Retirement System, which is indeed a fairly generous defined benefit plan. That plan was replaced in 1987 by the Federal Employee Retirement System which is has a less generous defined benefit (basically 1% of pay for each year employed), employees pay into Social Security and have a 403b (government version of a 401K). That's not to say that FERS is not a nice retirement plan for one to have in this day and age, but it's not the Federal Retirement Plan many people think it is. Most Federal employees that have the CSRS plan are retired, or will be within the next few years.

I agree that further adjustments in benefits and eligibility will likely be considered for Federal employees but courts have held that changes can't be made retroactively, so any changes made now won't have much of an effect for 2 to 3 decades.

Staffing levels for Federal Agencies are another area that I'm sure will be addressed (they'll have to be at some point) and the "muddle in the middle" that exists between the Agencies leadership and its field operations would be the logical place to focus.

For what it's worth, the elimination of entire Federal Agencies is beginning to become more of a "mainstream" idea and gaining popular support.

[Donald Pay]

The ARRA breaks down as follows:
37% tax cuts/incentives
18% local and state assistance
45% infrastructure projects

[George Mason]

Thank you William. To elaborate, current beneficiaries would not be cut, or called back. As we go forward these benefit, retirement and staffing plans have to change. Social Security has to change also. The current panel wants to raise the age in 50 years. It needs to change now. Every year, starting next year the age of eligibility should be increased by one year until the age for drawing benefits is 72 or 75. The system is already insolvent, this will hold off total collapse for awhile longer. Federal employees will live within the same framework. We also need to eliminate the golden handshakes for our elected representatives.

[Jimi]

Donald says, "The ARRA breaks down as follows: 37% tax cuts/incentives, 18% local and state assistance, 45% infrastructure projects"

But everybody knows:

"Expectations were that half or more of the stimulus package would go for infrastructure. The reality is that less than 13 percent of the funds appropriated in the American Recovery and Reinvestment Act of 2009 (ARRA) is dedicated to infrastructure, even broadly defined. A more realistic accounting puts the infrastructure share at about 7 percent. President Obama has also signed the Omnibus Appropriations Act of 2009, which does nothing to change infrastructure spending priorities; indeed, much of the spending in that bill is in the form of thousands of “earmarks,” a special-interest budgeting tactic the new president had promised to end."

The reality of the situation is that originally the money was design to be spread around, but that doesn't mean that it actually gets spent the way it was designed to be, and in this case the American People got the shaft!

[larry kurtz]

What is video loottery if not wealth redistribution?