Opinionista Yonela Diko 27 February 2018

Smaller governments work better? It hasn’t worked out that way

The predictable reaction of reducing the size of government when some of its programme does not work as efficiently as it should has led from one disaster to another. Where government is not available to regulate and restrain players, abuse is inevitable.

Author and mortgage banker Harlan Green takes no prisoners on the topic of big government vs small government.

Green is of the view that: “The fallacy that strong government impedes growth is now damaging the US economy, something that small government advocates don’t want to hear. Blindly downsizing government in the name of efficiency leads to very little growth and major recessions. In spite of the evidence, Republican candidates continue to advocate privatising everything from public education to social security, while further deregulating Wall Street”.

In his inaugural address in 2009, President Barack Obama said, “The question we ask today is not whether our government is too big or too small, but whether it works”.

Obama repeated this dictum a year later in his speech in Michigan, adding that, beyond size, it’s about whether we can create a smarter and better government. Obama had always portrayed himself as a pragmatist, not an ideologue.

Part of the problem, however, was the global experience which led to the 2008 economic crisis. Among many figures blamed for the 2008 financial crisis was the economic maestro, Alan Greenspan, former Federal Reserve chairman.

As many analysts have observed, Greenspan’s long-standing disdain for regulation and bureaucracy are today held up as leading causes of the mortgage crisis. Alan Greenspan and President Bill Clinton struck a special friendship, particularly after the 1993 programme of government reform by Clinton which was aimed at making government smaller and less involved in people’s lives and in the markets.

In a congressional hearing Greenspan admitted that he had “made a mistake in presuming” that financial firms could regulate themselves. Greenspan admitted at that hearing that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

The predictable reaction of reducing the size of government when some of its programme does not work as efficiently as it should has led from one disaster to another. Where government is not available to regulate and restrain players, abuse is inevitable. Businesses spend billions on tax lawyers and other consultants to find regulation loopholes that they can exploit. It is counterintuitive that, given this reality, any government would think the answer is to reduce and remove government from some social spaces.

In any social contract, government is the only hope of the smaller players that the bigger players will honour their part and play by the rules. Government is the only hope for the employee that the employer will do right by them as per the contracts. We can already see the lacklustre government presence in our farms which leaves farmworkers vulnerable to abuse.

In coverage that listed persons responsible for the 2008 economic crisis, the other prominent name that came up was that of Chris Cox, ex-Securities and Exchange Commission’s (SEC) chief who oversaw the dwindling SEC staff and a sharp drop in action against some traders.

Unlike Greenspan and Cox, who are the unabashed promoters of the free market, Paul Volcker, Greenspan’s predecessor, was skeptical that market forces would check lax regulation. As chairman, he refused to loosen the boundaries between investment and commercial banks, as later occurred under Greenspan.

In 1994 Bill Clinton declared that “the era of big government is over” and went on to reform welfare and cut some crucial government spending in order to balance the books. Clinton’s lean and mean reduction of government programme promised to save the federal government about $108-billion: $40.4-billion from a “smaller bureaucracy”, $36.4-billion from programme changes and $22.5-billion from streamlining contracting processes.

In a September 1996 pamphlet, Al Gore, Clinton’s Vice President, wrote that the federal government had reduced its workforce by nearly 24,000 as of January 1996, and that 13 of the 14 departments had reduced the size of their workforce. As would be admitted later, these were the building blocks to the economic disaster as government was removing itself as a force in the marketplace, turning the markets into a jungle.

Other writers like Tim Dunlop, who opposed scaling down on government, questioned whether the scaling down – through outsourcing, privatisation and globalisation – simply means citizens are disempowered and governments double-down in other areas?

As Michael Lewis states, “The term ‘big government’ stimulates plenty of images and emotions, and they’re generally negative. Words like ‘bureaucratic’, ‘inefficient’, ‘intrusive’, and even ‘corrupt’ are often associated with the term.

Economists charge that big government interferes with the mechanisms of free enterprise. Small government, on the other hand, is generally believed to lead to a more efficient and flexible system.

Getting government off our backs” or “getting government out of the way” are cries to return to the low-tax, no-regulation beliefs of the American Revolutionary period.

After stating the pros and cons of small or big government, Lewis concludes, “The terms ‘big government’ and ‘little government’ more likely reflect the attitude of the individual than the actual size or role of our existing government.”

As many publications have noted, including the New York Times, the problem of course is that experience speaks much louder than small or big government rhetoric. Champions of small government like Ronald Reagan and both Bushes actually governed over a spiraling government bill despite their small-government rhetoric.

In 1981, the year President Reagan took office, the federal government spent $678-billion; in 2006, it spent $2,655 billion. Adjust that 292% increase for inflation, and the federal government is still spending 84% more than it did when Reagan became president – in a country whose population has grown by only 30%.

As William Voegeli says, the reality is that “a more pros­perous society will need more of some government functions than a less prosperous one. More people will travel by plane and drive cars, for example, requiring more roads, airports, and air traffic controllers. More children will spend more years attending school, requiring more teachers and classrooms”.

More and more economists report that weakening government’s power to regulate and tax has stagnated economic growth by taking away wealth from the very majority who are the engine of our consumer society and diverting its profits to the least productive segment of society, the holders of capital or rentiers who live off the dividends and capital gains that have much lower tax rates than ordinary income earners.

There is therefore nothing that has given any evidence that reducing the size of government makes state function more efficient and effective. DM

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