The Public Square

Jeff Madrick

• Publisher: Princeton University Press
• Year: 2010
• ISBN:
  9781400834808
• Topic: Politics & International Relations
• Subtopic: American Government
• Index: Politics & International Relations

Political conservatives have long believed that the best government is a small government. But if this were true, noted economist Jeff Madrick argues, the nation would not be experiencing stagnant wages, rising health care costs, increasing unemployment, and concentrations of wealth for a narrow elite. In this perceptive and eye-opening book, Madrick proves that an engaged government--a big government of high taxes and wise regulations--is necessary for the social and economic answers that Americans desperately need in changing times. He shows that the big governments of past eras fostered greatness and prosperity, while weak, laissez-faire governments marked periods of corruption and exploitation. The Case for Big Government considers whether the government can adjust its current policies and set the country right.
Madrick explains why politics and economics should go hand in hand; why America benefits when the government actively nourishes economic growth; and why America must reject free market orthodoxy and adopt ambitious government-centered programs. He looks critically at today's politicians--at Republicans seeking to revive nineteenth-century principles, and at Democrats who are abandoning the pioneering efforts of the Great Society. Madrick paints a devastating portrait of the nation's declining social opportunities and how the economy has failed its workers. He looks critically at today's politicians and demonstrates that the government must correct itself to address these serious issues.
A practical call to arms, The Case for Big Government asks for innovation, experimentation, and a willingness to fail. The book sets aside ideology and proposes bold steps to ensure the nation's vitality.

PART I

GOVERNMENT
AND CHANGE
IN AMERICA

The Danger of an Ideology

IT IS CONVENTIONAL wisdom in America today that high levels of taxes and government spending diminish America’s prosperity. The claim strikes a deep intuitive chord, not only among those on the Right, but also among many on today’s Left. It has become so obvious to so many over the last thirty years, it hardly seems to require demonstration any longer. It is apparently so widely accepted by the public and rolls off the tongues of policymakers from both parties with such fluency that one would think the evidence needn’t even be gathered. Republican followers of Ronald Reagan remain the most ardent supporters of the idea. “Closed case: tax cuts mean growth,” wrote former Tennessee Republican Senator Fred Thompson, who can’t seem to imagine there could be an alternative argument.¹ Dick Armey, the former Texas congressman, has made almost a career of criticizing those who argue otherwise. Armey, who holds a doctorate in economics, claims to provide academic proof for the case against taxes and government, and sarcastically accuses those who dare disagree of fearing “big thoughts.”² The leading Republican lobbying groups—notably the Club of Growth, run by Stephen Moore who once worked for Armey in Congress, and Americans for Freedom, headed by the conservative firebrand Grover Norquist—make lower taxes their principal cause. Deregulation and minimal government oversight of markets go hand in hand with this argument, other cornerstones of the Reagan revolution kept alive in subsequent decades.

Many of today’s Democrats only partially disagree. To the conventional Democrat today, tax increases and increased government spending are by and large to be minimized and at best avoided. This is partly simple electoral calculation; holding any other position is considered politically destructive because the public has been so well convinced of its merit. But it has also become a matter of belief, as Democrats revise their traditional views and make deficit reduction their primary government objective. In fact, many Democrats had a hand in persuading the public of the dangers of big government. President Clinton successfully raised taxes on better-off Americans in 1993, but with the express purpose of reducing the federal deficit, not developing new social programs. The triumph of Republicans in the 1994 congressional elections reinforced the perception that American public opinion had turned against government. Clinton, determined to win a second term, abided by the sentiment. He proudly announced the new position of the centrist Democrats: “The era of big government is over,” he said with some fanfare in his State of the Union address of January, 1996, the year of his presidential re-election bid. For all the success of the Clinton tax increase, the Democratic Leadership Council (DLC), which Clinton helped found in the mid-1980s, continued to urge Democrats in later years to tread lightly regarding tax increases and the new social programs that require them. An “American Dream Initiative” in 2006, put forward by the DLC, recommended paying for modest new proposals only by closing tax loopholes, and demanded that no new programs should be enacted without a way of financing them. By then, Democrats generally favored more tax cuts for the middle class, and by 2008 the leading Democratic presidential candidates only agreed to raise taxes on high-income Americans. Without more tax money—PAYGO, as it was called—there could be few social initiatives. The Republicans had won strategically. Some Democrats also emphatically put the best face on the economic status of workers over these years, claiming a degree of success that was exaggerated, in an effort to make a case for minimizing new government social programs and to justify their political strategy.³

Federal deregulation also reflects such attitudes about government. The lax federal oversight under George W. Bush has taken an increasingly obvious toll, most notably in the credit crisis of 2008 with hundreds of billions of dollars of losses accrued at major financial institutions, but also in areas such as food and drug safety, airline traffic and safety, and most tragically with the aftermath of Hurricane Katrina. But few Democrats acknowledged how much they themselves contributed to a weakened regulatory attitude in the United States. Deregulation began to gain influence with the Nixon Administration in the early 1970s, but Jimmy Carter was a sincere believer and, aside from airline and trucking deregulation, which were arguably sensible, gave financial deregulation a decided push. Under Clinton, much of the New Deal regulatory apparatus designed to restrain financial market excesses was formally and proudly eliminated in 1999, though de facto erosions of the famed Glass-Steagall restriction were underway for a decade.

When Clinton had hundreds of billions of dollars of budget surpluses to bestow in the late 1990s, he left federal spending on transportation, education, and poverty programs below the spending levels reached as a proportion of national income (the Gross Domestic Product) under his Republican predecessor, George H. W. Bush, or under President Reagan. To meet his social goals, Clinton generally resorted to tax credits, despite the reduction in growth of military spending made possible by the end of the Cold War, to provide help for the working poor and the adoption of tax-advantaged programs to expand health insurance, retirement savings, and the affordability of college education.

Such an approach fit neatly into the new conventional wisdom that bigger government was a danger to prosperity. It also fit the ascending ideology of greater reliance on free markets. A tax break may encourage savings by exempting investment from income tax until retirement or raising incentives to work by creating a tax credit even as one’s income rises. But the market does the rest of the work, not government. The same faith in markets of course motivated broad deregulation. “Market incentives” became the new buzz phrase among middle-of-the road Democratic economists. Such an approach also had the great virtue of not requiring a tax increase to support a social program. But in fact it was costly to government; tax revenues were lost. Meanwhile, with Clinton’s encouragement, Wall Street hadn’t had such a friendly response from Democrats in anyone’s memory.

Some reforming of social programs was certainly necessary. Using subsidies rather than outright handouts can often make sense. Markets do have efficient distributive capacities which should be utilized as often as is sensible. But the new focus did not represent the return of clear-eyed pragmatism that it promised. Quite the opposite, it was an ideological turning point that moved the nation to the adoption of an antigovernment faith. “We know government doesn’t have all the answers,” Clinton said in his 1996 State of the Union address. But, though some progressive programs had indeed been overly ambitious and failed, no one ever promised that government did have all the answers. By citing this straw man, Clinton had joined those who painted the government with an ideological broad brush of disapproval, and he brought the Democratic Party with him.

Nobelist economist Milton Friedman, famed mentor and revered hero to Armey and others, was before his death in 2006 the leading and most articulate academic economist in favor of this antigovernment position. Friedman’s influence over theorists and policymakers alike was serious, and his rise to prominence simply remarkable. In the 1950s and 1960s, he was widely considered an extremist, if a well-schooled, intelligent, and articulate one. The frigid reception to his classic free-market book of 1962, Capitalism and Freedom, reflected the progressive attitudes of the Kennedy-Johnson years. But he pulled the entire mainstream profession unexpectedly in his direction in later years. By the 1970s, the book had become a best-seller, and his apostasy had become gospel to many.

Looking back, Friedman wrote in the preface to a 2002 edition of Capitalism and Freedom that people’s experience with government expansion since 1962 had convinced them his economic philosophy was right.⁴ In fact, the conservative movement’s great friend was not the book’s insights, which were simplistic, but the damaging hyperinflation of the 1970s, which Friedman and others misleadingly attributed to government spending directly. By the late 1970s, most of America was convinced that government was the issue. It was effective simple politics and bad analysis. In Reagan’s 1980 debate with Jimmy Carter before the November presidential election, he told Americans they had to live with inflation, not because they lived too well but because government did. The well-said message stuck in the mind of the public. After the debate, Reagan’s approval ratings rose markedly in public opinion surveys, and he won easily a week later.⁵

Friedman offered much ideology but little evidence that big government was the root of the problem. The causes of inflation in the 1970s were far more complex than the growing money supply—the factor that Friedman emphasized and linked to growing federal spending.⁶ Rising government budget deficits can contribute to inflation, but other equally or more prominent causes in this complex decade included the eightfold hike in oil prices by the cartel of exporting nations, remarkably bad crop supplies worldwide, a sudden downshift in productivity growth not anticipated by any economist, including Friedman, and the fall in the value of the dollar. As for the size of government, federal expenditures were only one percentage point higher in the first half of the 1970s as a proportion of GDP than they were in the first half of the 1960s, yet annual inflation started to rise rapidly in the early 1970s while annual consumer price inflation was only slightly more than 1 percent in the early 1960s. What of the budget deficits that horrified Americans in the 1970s? Even in the worst years of the 1970s, as a proportion of the economy budget deficits were not larger than they were during the worst years of George W. Bush’s administration in the early 2000s, when inflation was mild.

But Friedman’s argument about the dangers of government was politically effective for a variety of reasons, including weariness over the Vietnam War, the Watergate scandal, the counterculture, and national desegregation policies. It also found reinforcing echoes in America’s nostalgia for an artificial laissez-faire past. Reagan was Friedman’s translator. And the mythology remains with the nation. In his early campaigning for the Republican presidential campaign in 2008, Mike Huckabee, governor of Arkansas, and admirer of Reagan, put the old American myth simply. “The greatness of this country has never been in its government,” he said in a speech before the New Hampshire primary. “Any time the government gives something to us, they first have to take something from us.”⁷

This book is a refutation of such assertions. The popular economic case against big government, including the more moderate Democratic version, does not stand up to the evidence. Big-government and high-tax nations do not grow systematically more slowly than nations with lower government spending as a proportion of the economy and lower tax rates. More precisely, big-government and high-tax nations elsewhere simply do not in the real world automatically undermine the capacity to produce more for an extra hour of work—its productivity. Peter Lindert of the University of California at Davis spent years compiling data on the subject in a 2004 book. There is, he concludes, a dramatic “conflict between intuition and evidence. It is well-known that higher taxes and transfers reduce productivity. Well-known—but unsupported by statistics and history.”⁸

I am not arguing here that there is evidence that big government and high taxes are always and everywhere good. If government is managed poorly, it can have damaging effects. Can taxes be raised too high in the short run? Yes. High taxes can undermine motivation and incentives to work and invest, but economists who devotedly maintain that government undermines growth almost always seriously exaggerate these disincentives. Can social programs be poorly managed or counter productive? Yes.

What I am arguing is that judging by the careful assessment of economic achievements by nations with high taxes and large governments, and judging by American history itself, active and sizable government has been essential to growth and prosperity among the world’s rich nations, including America. Any impact on incentives and any displacement of private spending by higher taxes have been well more than compensated for, history shows, by spending programs and regulatory functions that enhance growth. If tax revenues are used to invest productively in the nation’s human capital, its infrastructure, its legal system, and the fair distribution of economic rewards, they have typically been essential to growth. These programs create the tools and assets that enable the private markets to function.

The book goes one step further. It argues that big or small government is not the critical criterion in economics. To the contrary, government’s management of change is what is critical. And government is a key and arguably the main agent of change. Without an active government, a nation cannot respond adequately to its times. If it does not respond to new conditions, both economic growth and the ability to retain a nation’s values will suffer. In the laboratory of the real world, the governments of rich nations have on balance been central to economic growth, and in the process have retained their citizens’ faith in their nations’ promise and social values. Does this mean government must be big? The lesson is that pragmatic government should prevail over any categorical or typically ideological dismissal of the uses of government, including Bill Clinton’s. If what we think of as big government is necessary to manage change, and in a complex society it may well be, then we should pursue it actively and positively, and make it function well.

Today, an ideological antagonism toward government in the United States has deeply undermined the nation’s capacity to deal with its rapidly changing times. These changes include rising competition around the globe, a marked worsening in wage growth and widening of income distribution since the 1970s, the rapidly rising costs of health care, an aging population, and the need for ever-more years of education. The two-worker family has become t...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Acknowledgments
• Foreword
• Preface to the Paperback Edition
• Part I: Government and Change in America
• Part II: How Much we have Changed
• Part III: What to do
• Notes
• Index