The Role of Government

June 15th, 2012 at 7:56 am

The President and Gov Romney gave dueling speeches in the swing state of Ohio yesterday, laying out broad economic themes, so it is incumbent on OTE to look under the hoods.  Here’s what I’ve got.

It is, of course, impossible for politics to be anything but deeply political right now.

By that cryptic statement, I mean that it’s actually hard to listen to the core of what the presidential candidates are saying through anything like an objective lens.  It’s all positioning, framing yourself and your opponent, capitalizing on their gaffes while walking yours back, presenting plans but assiduously avoiding key details.  And with the media, understandably, in full horse-race mode, an actual substantive analysis of the candidates’ positions may be nigh impossible.

But I’m going to try anyway.

Their main argument is far less than you’d think about jobs records, the role of private equity, who best understands the economy, how much better/worse things would be if Congress would just cooperate.  Such issues are obviously relevant and they’ll be in the mix until Election Day.  But I find it hard to believe those arguments will change many minds—that they’ll change the vote of someone who’s already leaning toward one side or the other.

Their main argument is about the role of government in our lives.  Neither believes that government should be a dominant force—both stress the primacy of the private market in a capitalist economy.  Both recognize that absent market failures, the incentive structure of the private sector will provide the best opportunities and allow people to make the best choices, in the sense of promoting the most well-being for the most people.

But the President sees more market failures, market barriers, inherent instabilities, inequalities and inefficiencies than does Governor Romney.  And in this regard, he sees more of a role for government.  He has taken to citing Lincoln on this point, as he did yesterday: “through government we should do together what we cannot do as well for ourselves.”

I doubt Mitt Romney would disagree with that.  But he would draw the line in a very different place.

For example, he has been extremely critical of the stimulus package, and, as Jonathan Cohn notes here, would not try to temporarily replace the lost demand in a recession–a clear market failure–through Keynesian stimulus.  When it comes to health care, he does not view the “individual” market—where people shop for health insurance on their own as opposed to as part of an employer or gov’t group–as part of the problem.  He views it as part of the solution, and would provide individuals with a voucher to shop for coverage.  He would not have rescued GM and Chrysler.

He does not see a federal role for safety net programs like Unemployment Insurance or nutritional programs—he would turn these over to the states.  That loses their countercyclical function, but it’s also consistent with his position against trying to mitigate recession with government programs.

Similarly, he would reduce financial aid and cut back on Head Start (at least, those are the implications of budget cuts he has advocated).

This is the agenda of someone who, in reference to the above quote from Lincoln, envisions more people doing more things for themselves than they do now or than they’d do under President Obama’s vision.

In the agenda the President spoke of yesterday, for example, government programs should help stimulate job creation in periods of high unemployment.  It was in this spirit that he decided to rescue the auto companies, believing that absent government action at this time of credit market collapse (another market failure), no one other than the federal government would supply the needed capital.

Where he draws the “Lincoln line,” market barriers like poverty block children from access to education.  Left to their own devices, private firms will under invest developing technologies, like advanced batteries, and no firm could single-handedly undertake the R&D and interstate coordination of an updated energy-transmission grid.  The market will fail to provide adequate, affordable health coverage.  Financial markets will become increasingly unstable and will expose taxpayers to large losses.

The implications of these different visions for government will get a lot more attention than the visions themselves.  If you believe in a lot less government, you can cut a lot more taxes (at least you can if you’re really serious about all those spending cuts—otherwise, you’ll just have much higher deficits).  And vice versa—if you plan to offset large market failures, like millions of uninsured, you’ll need more revenue.

So we’ll continue to scrum around with jobs created and regulations and small business and tax cuts and deficits and fiscal cliffs and budget baselines.

But it would be better if we could get a lot deeper into this fundamental question of government’s role, because that’s the real substantive difference.  That’s what America is being asked to decide in the next election…not whose gaffes are more damning.

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10 comments in reply to "The Role of Government"

  1. Tom High says:

    Mr B. could you at some point examine the whole concept of the “updated energy-transmission grid”? Specifically, is it in our economic and national security interests to pursue this instead of decentralized efficiency and power generation first, i.e., having each building in the U.S. being, in effect, it’s own power plant? Not that both aren’t necessary, I just have doubts about the bang for the buck from the grid-first approach.

  2. save_the_rustbelt says:

    Shorter version:

    Democrats overregulate

    Republicans underregulate

    Business gets tired of being whipsawed

    Ergo, hiring is going to be behind the curve instead of ahead

    Apologies for being brief and logical, I realize this is an econ blog. 🙂

    • April says:

      Businesses that are monopolies are not hiring in the USA or complaining that they can’t find “qualified” workers so they want to import H1b visa types for 6 years a piece to do the work that must be done onshore.

      Break up the monopolies and restore Competition and you will once again have Capitalism flourish.

  3. Nhon Tran says:

    Thank you for this posting. I think the key issue on most voters’ mind is who will be more able to work the system to achieve stronger growth in jobs and to reverse the decline in income/wealth of (most) households.

  4. April says:

    One connection that should be added to the discussion is that R’s don’t really want less government but they want the functions performed by for profit private enterprise. Taxpayer need to understand that we now pay a “profit” premium for so many things that government does. Military contractors instead of the troops doing KP duty or building the “huts”. The For Profit colleges who advertise heavily and extract huge tuition and fees from the students, many of whom never graduate but have taxpayer/government guaranteed loans.

    The talking point of small government is really just a cover for a privatized government costing taxpayers even more. has great material to fight the privateers.

  5. Rima Regas says:

    It would behoove the Administration and its best surrogates to educate the public in mini videos/speeches on Philosophy 101 and Econ 101. The meaning, heck the concept, of the social contract got lost somewhere along the way in the last thirty years. We need to reteach the concept; reframe it in familiar terms and familiar contextual connections for the various groups that comprise our electorate. People on the left often marvel, even criticize, the likes of Paul Ryan for espousing views that run counter to his faith, while exhorting his adherence to canon law. Smart, well-spoken, bearded and clean-shaven economists, sociologists, and philosophers should give people a refresher course. Most people don’t care about the latest data and what it means. Many readily admit they don’t understand the math of the economy. They do, however, understand the human component. That is where I believe the emphasis must be placed. Right now, social contract means socialism to many. That’s not right and can be corrected.

  6. greg says:

    One of the main functions of government is to consume excess production, hopefully in a socially constructive manner, and so maintain the price level. A la Keynes, but even in ‘good’ times. To do this in perpetuity, its debt cannot get out of hand, but must be constrained as a percentage of GDP. This means collect more taxes, particularly from the rich, as they consume less as a percentage of their income than the rest of the population. That is, the economic multiplier on taxes on the wealthy is greater than one, that is stimulative. Thus a strongly progressive tax. On the contrary, the absence of a progressive tax will be depressive, and destabilizing, as wealth becomes more concentrated and inequality increases.

    Privatizing is counterproductive, since profits in privatized industries cause an increase in the upward redistribution of income, which must be counteracted with an even greater progressivity of taxes to compensate.

  7. Paul Cornell du Houx says:

    “But it would be better if we could get a lot deeper into this fundamental question of government’s role, because that’s the real substantive difference.”

    In his speeches (including this one) President Obama often puts the role of government in terms of the kind of society we are going to be; one where wealth and equal opportunity grow from the bottom and middle class upwards, encouraged by good government or one where inequality and disparity of wealth reaches extremes like those that inflamed the American Revolution, where our founding principles were forged. The Right, now represented by the disingenuous and clever Romney, has become sufficiently extreme to be considered as a cultural counterrevolution. The question is fast becoming not one of the role of our democratic government, but of what kind of “democracy” we are going to have, if any. These are the destinations of the two avenues the president is asking us to decide on: ultimately, democracy or not. There is gridlock because the Republicans don’t believe in compromise; there is no democracy without compromise. The leadership understands this well enough. President Obama is asking the people to “break the gridlock.” Vote for real democracy. Not “democracy in name only. This is how “deep” in it we now are.

  8. readerOfTeaLeaves says:

    I respectfully disagree that the prime disagreement in 2012 is about ‘the role and size of government’. That meme tragically fails to address the deeper, structural question of ‘what an economy is

    Legacy industries that rely on extracting natural resources (a la Koch Brothers) are desperate to keep their grip on the regulation, tax, and legislative rules because their business models are being challenged by emerging methods and technologies.

    Nevertheless, it is increasingly clear that a vibrant economy is an ecosystem: it is comprised of feedback loops, and the amount of trust in the system will increase or decrease the amount of economic activity .

    I’m in complete agreement with Hanauer and Liu (“The Gardens of Democracy”) that:
    1. An economy is fundamentally an ecosystem based on myriad (unpredictable) social interactions, rather than a linear, predetermined, mechanistic system.
    2. Social activity and the quality of relationships, including trust and accountability, are essential for prosperity.
    3. Everybody does better when everybody does better; more participants = more feedback loops = more economic activity.
    4. The US middle class is one of the greatest achievements of human history, and is the biggest economic engine on the planet.
    5. Economic inequality is bad for business (!); inequality translates to diminished economic activity overall, and this threatens the viability of the system. (Inequality is essentially to an economy what desertification is to natural systems; the system becomes fragile, and increasingly less capable of restoring itself.)

    Let me further illustrate how two different views of ‘what an economy is’ play out in business: compare and contrast what I understand of Romney’s activity in Staples (admittedly a cursory reading), with say… Amazon:

    First, using a small down payment, buy a company called “Staples” and force it to take out a mortgage that it will have to repay.
    Second, divide ‘Staples LLC’ into
    — a property-real estate arm (Staples Property LLC), and
    — a retail arm (Staples Retail LLC).
    Third, use the retail arm (Staples Retail LLC) to pay monthly rent to the property arm.
    Fourth, place the BigBox real property assets of Staples Property LLC on your hedge fund books as assets, and count these as profits.
    Fifth, claim that you have created new wealth and jobs.

    Number of technologies created: 0
    Number of new innovations created: 0
    Number of tax loopholes, LLC’s, and accounting machinations: ?

    Contrast with say, Amazon or iTunes or any other emerging, vibrant, innovative business:
    First, create the online assets including: security, encryption systems, payment options, customer support, coordination with (global) logistics and distribution systems.

    — when someone places an order *for a hard copy of a book, music, or other media*, the customer receives: (a) order confirmation, (b) the order is executed – requiring coordination among payment, distribution, publishing, and tech support employees. Finally, (d) the system creates information about the order, in other words the system ‘informates’ and in this sense it is adapting to the new information within the system.
    — when someone places an order for *a digital copy of a book, music, or other media*, the user receives (a) order confirmation, (b) the system generates the order, and (c) the media is downloaded. Finally, (d) the system creates information about the order, in other words the system ‘informates’ and in this sense it is adapting to this new information within the system.

    Third, this ‘informated’ content becomes a feedback loop that allows this system to be complex and adaptive: if a whole bunch of orders come in for “The Gardens of Democracy” (Hanauer and Liu), then the system can respond by creating promos in real-time, from aggregated feedback collected by the system about that title.

    Fourth, this economic ecosystem is affected by the feedback loops of millions (billions!) of customers, all acting individually. The system adapts itself *constantly* to new conditions — thereby, creating new job opportunities and new products that constitute something more economically productive than the Staples-rental-model of economic debt-and-stagnation.

    Number of technologies created: encryption, payment systems, logistics, publishing (including eBook technologies), Kindles, iPads, screen readers, transportation innovations (refining logistics), mapping technologies, software.
    Number of new innovations created: numerous
    Number of tax loopholes, LLC’s, and accounting machinations: beyond my level of expertise.

    See also: Eric Liu and Nick Hanauer, Part 3 of their interview on Charlie Rose, April 2012:

    This election should be about “what an economy is”, because once we get more clear about that — at a time when the underlying economic structures are undergoing metamorphosis — then we might have a worthy conversation about what forms of government would best enable us all to be better gardeners of our businesses and communities.

    We’ve heard ‘big vs small’ since Reagan, and it simply plays into the hands of people who control oil and gas pipelines, while demolishing the greatest economic resource ever seen: the US middle class.

  9. Misaki says:

    >The market will fail to provide adequate, affordable health coverage.

    Adequate, affordable health coverage through the market without introducing price caps for medical services or government health cost subsidies:

    Opinions about the President’s good intentions remain high, but opinions about his competence to complete his (and the nation’s) objectives are significantly lower. And naturally, since a majority of the population is opposed to job creation through government spending.

    In other words, there is no need to go beyond job creation because it is the major problem in the US today. Furthermore, most people already have an opinion on whether they think the role of government should include job creation via spending.

    Job creation without government spending, inflation, or trade barriers: