On the objection to government growth

Objection to the growth of government is one of the main themes in economics today, because of the cost involved in government growth. Until things deteriorated to the point that all analysis became political, cost was explicitly the driving issue behind that objection.

Things deteriorated because government was unable to stop it.^[1] But along with continued economic deterioration, there came also a deterioration in our view of government. Because the government had failed, people stopped expecting it to succeed in stopping the deterioration. Instead, we turned on government. We came to see government as the cause of deterioration. Our solution changed as well: Our solution now is to object to government itself, and reject it.

After half a century of deterioration and decline, we had come to think the economic problem was unsolvable. It was not. The problem was never solved because the wrong solutions were tried. The right solution existed, but was not adopted.

The problem we see today, however, cannot be solved. Government is NOT the cause of the problem, but we think it is, so government growth -- or "government" -- is the problem we are trying to solve. But we can only fail to solve it, because the size (or existence) of government is not the problem. Oh, we may end up destroying our own government, yes, or changing it so much that it is effectively destroyed. But this will not solve the initial problem, the economic problem that began as a cost problem with an unknown cause. We may succeed in destroying our own government, but even that will not solve our cost problem. The cost problem will remain even after we have destroyed our government.

 

I should have said already that if we look at things today, yes certainly it appears that government is the problem. In large part this is because government failed to solve the real problems, which let things continue to grow worse. In addition, government has tried to adapt, and this has made things worse. Adapting to problems is not a solution.

The original problem was (and still is) a cost problem, an economic problem. The cost was (and still is) the growing cost of finance, which is a consequence of the growing size of finance, which itself is a consequence of human nature and economic policy. And maybe we cannot change human nature, but we can change policy. We just need the right plan.

Finance creates cost but does not create output. It certainly does not create output in proportion to cost. Therefore, finance creates a form of inflation: the inflation called "cost-push". Since the late 1940s at least, wages have been said to be the cause of cost-push inflation. That analysis has been incorrect since the late 1950s.

Many people say there is no such thing as cost-push inflation because cost shocks are temporary. That is correct, as far as it goes. But it is US policy to promote the growth of finance and the availability and use of credit. Because of policy, the cost shock created by the cost of finance is a "permanent" (long-term) shock that can and does create cost-push inflation. It slows economic growth as well, and has done for half a century.

The longer our decline continues, the farther we are from the initial cause of the problem and the less likely we are to discover (and solve) that problem. But again, the cost problem will not go away even if the government goes away.

Even a strong, healthy economy cannot support both a high and rising standard of living and profits enough to keep that economy strong and healthy ... and yet also sustain a large and growing financial sector. Finance is a parasite. National Geographic describes the problem:

In parasitism, one species (the parasite) lives with, on, or in a host species, at the expense of the host species. Unlike in predation, the host is not immediately killed by the parasite, though it may sicken and die over time.

The consumption sector and the nonfinancial business sector are the host species; finance is the parasite that is causing the hosts to sicken and die.

My son Aaron came to visit recently. Talking about the economy, he said "Things don't get this bad by accident." He's not suspicious. He's not paranoid. He thinks about things. He says only that the results we have now are not random.

I agree with him, except I worry that he thinks there is a carefully designed plan to make things go bad. I don't see that purposeful plan. I think people have different ideas about what needs to be done. I think the people in power see things from their own perspective, the perspective of wealth and power. When they make decisions to improve things, they see improvement from their own perspective. And indeed, things do get better -- for them. That, however, is not the solution America needs.

After we eradicate the parasite, or reduce it to a small infestation and find a way to keep it small, our economy will begin to regain its health and vigor. At that point the discussion of government size should again come into its own. And we will find that our solutions (whatever we decide) will work, because the financial impediment has been removed at last.