The Government Is the Problem
Ronald Reagan said “Government is not the solution to our problems, government is the problem.” Nowhere does this appear more true than with the state of the global economy today. My fellow blogger Robert Higgs has repeatedly emphasized the government creation of regime uncertainty that keeps unemployment high and investment low, because businesses are reluctant to hire and invest when uncertain government policies can make those decisions more costly in the future. Even more directly, the world-wide economic instability caused by the budgetary excesses in Greece, Italy, and other Eurozone countries hinders global recovery. Meanwhile, the unsustainable deficits in the United States have become so obvious that even people in Congress are aware of them! The Congressional Deficit Reduction Super Committee will make its report to Congress on November 23... if they can reach an agreement.
President Reagan made the general observation that government is the problem, but more specifically on the subject above, government is creating economic instability, not reducing it. Meanwhile, the conventional economic wisdom, both among many professional economists and among politicians, is that government should intervene more to stabilize the economy. Christina Romer says the Federal Reserve has not been aggressive enough in their stimulus efforts, and numerous commentators, led by Paul Krugman, say we need more stimulus spending.
Yes, there are economists who argue differently. I’m one of them. It appears to me that those who are arguing for more government intervention are saying “This didn’t work before, so let’s try more of it.” There are reasons these interventions haven’t worked. The more government takes out of the economy, the less will be left for private sector production. The more uncertainty government produces, the less businesses are willing to hire and invest.
Government stimulus efforts, which have thus far shown no evidence that they work, are meanwhile burdening us with budget deficits in excess of a trillion dollars a year, and a national debt approaching $15 trillion. That is a lot to pay for something that doesn’t work.
I am disappointed in my profession—the economics profession—for not seeing more clearly that government is not stabilizing the economy, it is creating instability. This points to fundamental problems in mainstream methodology. Economists tend to depict citizens as mathematical functions who react to situations in a predictable and repeatable way, and government as an omniscient benevolent dictator that knows the optimal course of action, and follows it. Once these unrealistic assumptions are stripped away, the idea that the government is a stabilizing force on the economy vanishes with them.