Stimulating a Recovery in the Economy: the Economic and Political Realities - Research Paper Example

The question of what a government’s role is during an economic crisis is a frequently asked one, especially now since that the issue of an economic crisis, and the business cycle as a whole, has come to the fore with a recent recession and contraction in the global economy. Of course, the debate over whether the government should take a passive or active role in stimulating a recovery in the economy is an economic one. But, in many ways, it is a profoundly political question, resting on such related questions as the extent to which the public has confidence or trust in its government, or whether a specific government is well-equipped enough to provide the kind of resources to truly have an effect on an economy’s recovery. All of these concerns provide a framework for combining a methodical analysis of the economic and political realities in which we all live. In order to avoid politicizing the discussion of whether a government should intervene with some, or perhaps all, of its power to stimulate economic recovery and growth, the best way of moving forward is to provide an objective and positive (rather than normative) look at the role of government and the role of particular systemically important institutions, which, as we all learned from the financial crisis of the past year, are instrumental to the financial health of not only the United States but also the world. From the privileged perspective of having just observed extensive government intervention in one of the worst recessions in history, the role of any government during a financial crisis should be concentrated not on spiking demand (that is, increasing expenditures and losing public trust), but on ensuring the integrity of systemically important institutions like the financial system through regulatory agencies and bodies like the Federal Reserve. A great deal of ink has been spilled over two subjects that are particularly important to first providing a framework within which one can answer the question of a government’s role in the economy. The first issue is of the size of government, where “size” refers in varying degrees to its scope of power, both economically and politically. The second issue is of the public’s trust in government, where “trust” signifies the public’s confidence in what the government does will work. These two issues are significant in two respects: First, the public trust in the government seems to decrease in an inverse correlation to the increase in the size of government. Polls in 1979 and 1938 reflect the same attitudes in Americans: that the government (with no distinctions between federal, state, and local) “spends too much money” (Lewis-Beck and Rice 3). Second, in countries which pride themselves on their representative styles of democratic or republican governments, it stands to reason that the majority opinion on matters such as the size and scope of the government should be taken into account, either on the floor of Congress or in the voting booth. However, polls as recent as those conducted within the last year suggest Americans still see the government as too expenditure-laden, and that the deficit is one of the largest problems the United States faces going forward (Reuters). These opinions indicate growing distrust with the American government: distrust that must be addressed if the political situation in America is to remain stable. If a people cannot trust that the actions of their government will protect their interests and the interests of the nation, the government’s actions cannot be said to be “effective” in the sense that a government exists in order to protect the rights and livelihoods of its citizens. The founding principles of the United States, as codified by Thomas Jefferson’s Declaration of Independence states roughly that governments are instituted among people for the purpose of protecting what have been throughout the history of political philosophy called “natural rights”, or as Jefferson says, “life, liberty, and the pursuit of happiness”. Governments that become ineffective at protecting these rights, from criminals or foreign invaders or the government itself, are then liable to destruction and reconstitution. Robert D. Putnam says, “Political unhappiness of all sorts has mushroomed during the past three decades… Today’s cynical views may or may not be more accurate than the Pollyannaish views of the early sixties, but they undermine the political confidence necessary to motivate and sustain political involvement” (Putnam 47). This point is significant insofar as distrust in government, particularly distrust over the government’s perceived or real, present or future ability to protect the rights of its citizens negatively impacts the government’s ability to create and execute public policy. If the American people become less politically involved, the government is starved and becomes sickly. But strangely, this is not the case. Political involvement on the part of Americans seems as lively as ever, with news stations, politicized think tanks, and lobbying groups everywhere. However, this ubiquity of politics in the daily lives of Americans may reflect only the size of government, not the public’s concern. The issue of whether the government is too “big” or “small” depends on one’s normative conception of what the ideal size of government is which runs the gamut from libertarian styles of anarchism to populist authoritarian models of political control. This accounts for the great disparity in the number of analysts who answer this question in the context of government expenditures, with some analysts saying the government has grown little while some analysts are saying the government has grown much through the 20th century. If we are to use a measure of expenditure, at all levels of government and in terms of relative growth, it seems the government has “experienced considerable growth” (Lewis-Beck and Rice 5). At this point, one ought to be clear a growth in government is not necessarily a bad thing. Rapid and gradual expansions in the government through time, such as in times of war, trade short-term loss for long-term gain. What is at issue when considering the issue of the size of government is not whether it is too big or too small in some absolute term. Rather, what is important is the public’s normative conception of the ideal size. This conception underlies whether the public says the government is functioning well to protect its rights and whether the political structure is stable or not. What is significant in this discussion of the size of government is the size of government’s statistical relationship with public trust in government, a relationship in the form of an inverse correlation. As the size of government increases, the public trust in the government decreases. A mediating factor in this relationship is, of course, ideology. In the United States, ideology mediates the effects of political trust in attitudes about distributive and redistributive spending. This distinction between distributive and redistributive spending is not conceptually useful here for consideration in the size of government, but is conceptually significant to certain ideological groups with normative objections to the latter category. As Thomas J. Rudolph and Jillian Evans argue, political trust has a much larger effect on a wider range of public policy than previously thought in the political science body of literature on the subject. The relationship between spending, ideology, and trust is a dynamic one. Trust is invariably diminished when individuals are asked to sacrifice ideology, and trust is conditioned by ideology (Rudolph and Evans). Therefore, even though the relationship between trust and spending is indirect and causally conditioned, it still exists. And even if the kind of ideology (broadly spoken of in terms of conservative or liberal) has an effect on the strength of the inverse correlation, the correlation exists regardless of ideology, as statistics on the trends of political trust and government size demonstrate (Lewis-Beck and Rice 5) (Cook and Gronke 792-5). The relationship between these dynamically related variables may not be clear when it comes to a financial crisis. However, the nature of a financial crisis makes it similar to other kinds of crisis that governments must deal with, such as a natural disaster or an invasion. Each of these different kinds of crises deal with the potential collapse of institutions that are important for the global functioning of the entire government. In the case of a financial crisis, the institutions that are at risk are financial ones. The financial institutions liable to collapse during financial crisis include banking interests that serve wide segments of private business and personal interests with credit and other financial services. The collapse of financial institutions is deemed systemically unallowable by a body such as a central bank, and their bad assets are financed by taxpayer money. Although there exist distinctly economic problems with having the government finance toxic assets and saving failed institutions, the real problems are political. It requires a great deal of money to buy toxic assets and get them off the books of the financial institutions. These massive expenditures must come from borrowing money, which the government must then pay back, with interest, either from more borrowing or from raising taxes. Either way, the deficit of the government is expanded, and citizens lose faith in their government to repay these debts and to provide the kinds of services they need. Therefore, the problem with extensive government intervention in a financial crisis is not so much that the government is creating an unsustainable financial debt. Economist Paul Krugman, an advocate of the kind of Keynesian economics that emphasizes the need for governmental involvement to stimulate demand in an economy, has said the government’s ability to take on such large levels of debt has actually saved the world (Krugman). The problem is a political one: huge expansions in the size of the government’s balance sheet, with expenditures to buy segments of toxic assets (where “toxic” refers to the fact these assets are garbage, or worthless), demonstrates a kind of recklessness with taxpayer money, which the American people would rather see spent on institutions capable of protecting their interests, like public schools. Even if these kinds of measures to stimulate the financial system after a crisis are necessary to get credit and money flowing again, economic ignorance in the public still will cause a decrease in public trust in the government. Mediated by ideology, this growing mistrust causes greater government waste, inefficiency, and eventually cynicism. Consequently, it seems the proper role for a government when a financial or economic crisis hits is to make as few interventions as possible. This precludes bailing out failed institutions, even those that are deemed systemically important, and providing Keynesian-inspired packages of funds to local and state governments to encourage spending and demand in the economy. It seems that, by and large, the American stimulus has failed to create the kind of economic growth promised as it was passed, and that current economic forecasts have “hope built in” (Leonhardt B1). What these packages did accomplish, however, was yet another decrease in public trust: the allocation of an unthinkable amount of money to projects that have not yet yielded any real results for the economic realities most people live in. An economic critique of the stimulus measures or the underlying economic philosophy is not necessary here, except to say that some economists believe the business cycle, such as the one seen in the housing industry which was the ultimate source of the financial crisis under discussion, is actually caused by government policies and measures to increase demand within economies (Cochran and Call 34). Although the government’s response to a financial crisis has been criticized throughout the previous pages, this is not to say the government has no role in creating the environment in which a successful resolution to the crisis can be attained. What this means is a government’s responsibility in a financial crisis is not to artificially create demand or unfreeze supply, or in any other way interfere with market forces and prolong presently existing problems by making them disappear in the short term. This widespread political focus on the short term has been indicted as the almost inevitable cause of a future collapse (Farrell). Rather than spending unconscionable amounts of money to correct presently existing problems, the focus of the government ought to be on maintaining its public image as a body committed to preventing future problems through regulatory frameworks that maintain the integrity of existing institutions, like the financial sector that almost collapsed in 2008. Doing so, the government will show the American people it is committed to maintaining stability and to protecting the wealth of its citizens. But by printing and borrowing money to monetize and expand debt levels, public trust in the government (especially among fiscal conservatives) is inevitably going lower, fueled by ignorance of why exactly the government was spending the money it did. The agency primarily in charge of maintaining and regulating the banking sector, which is perhaps the root of financial stability in the United States, is the quasi-public, quasi-private Federal Reserve, the central bank of the United States. The Federal Reserve manages the nation’s monetary policy and money supply, regulates banking institutions, maintains the stability of the financial system, and provides financial services to the United States government. The Federal Reserve is the government’s means of protecting the financial system through regulation and sound policy. Since it is the Federal Reserve making monetary policy, and not the government, which actually spends the money, it is the government’s job to maintain the integrity of the Federal Reserve such that it can continue to make sound monetary policy and continue to finance American banks and businesses. Some economists have blamed the Federal Reserve for creating artificial demand for houses in the 1990s and 2000s by keeping the cost of borrowing money artificially cheap. As credit was cheap, individuals borrowed and spent recklessly, which led to the housing bubble and an unstable financial system (Paul). The Federal Reserve’s oversight in this case was caused by government policies that undermined the autonomy of the agency. When monetary policy is set by the government, instead of the Federal Reserve, the system of checks in government is undermined, and the public trust in the government to protect individuals’ finances (and therefore their rights) is diminished. Having a government in control of monetary policy also inevitably leads to increases in expenditures because of the availability of money. Economists (particularly of the Keynesian ideological persuasion) have argued that market forces do not fully account for the economic behavior empirically studied in the field (Boarman 32). This is true, as is the case with the Federal Reserve, and its influence on the financial sector in the United States. In a study of Nordic countries, specifically the relationship between their central banks and governments, Paavo Uusitalo argues that the extent to which a government favors Keynesian (identified as “social democratic”) economic policies, that government is likely to minimize the distance between itself and its central bank (Uusitalo). Less autonomy in the central bank means the government is more able to engage in interventionist policies. The primary difference, however, between Nordic countries and the United States is the ideological mediator, with fiscal conservatism playing a much larger role in the latter, and thus decreasing public trust, inverse to the increase in Keynesian kinds of economic policies. Resistance to this kind of movement toward a larger government is pronounced in the United States. With regard to public trust, this is understandable. As Thomas Havrilesky points out, a less autonomous Federal Reserve implies a greater availability of funds for the government to spend, and less resistance for Keynesian kinds of measures, like an ineffective stimulus (Havrilesky). The role of the United States government in dealing with a financial crisis ought to be minimal, not only for economic reasons but also for political ones as well. As government spending increases, political trust decreases: a relationship mediated by ideology. Instead, the government should focus its efforts on maintaining the integrity of systemically important institutions by establishing comprehensive regulation and by ensuring as much autonomy of the central bank as possible. Cutting spending and a move away from Keynesian economic policies that negatively reflect the image of the United States will encourage public trust, and work well to promote the stability of the American political institutions already in place. Works Cited Boarman, Patrick M. "Beyond Supply and Demand: The Framework of the Market Economy." Challenge, Vol. 37 (1994): 31-38. Cochran, John P. and Steven T. Call. "The Role of Fractional-Reserve Banking and Financial Intermediation in the Money Supply Process: Keynes and the Austrians." The Quarterly Journal of Austrian Economis, Vol. 1, No. 3 (1998): 29-40. Cook, Timothy E. and Paul Gronke. "The Skeptical American: Revisiting the Meanings of Trust in Government and Confidence in Institutions." The Journal of Politics, Vol. 67, No. 3 (2005): 784-803. Farrell, Paul B. Death of Soul of Capitalism: Bogle, Faber, Moore. Arroyo Grande, CA, 20 October 2009. Havrilesky, Thomas. "The Federal Reserve Chairman as Hero: Our Defense against Monetary Excesses?" Cato Journal, Vol. 11, No. 1 (1991): 65-72. Krugman, Paul. "The Keynesian moment." 29 November 2008. New York Times. 18 October 2009 . Leonhardt, David. "A Forecast With Hope Built In ." New York Times 30 June 2009: B1. Lewis-Beck, Michael S. and Tom W. Rice. "Government Growth in the United States." The Journal of Politics, Vol. 47, No. 1 (1985): 2-30. Paul, Ron. "Dont Blame the Market for Housing Bubble." Texas Straight Talk 19 March 2007: 4-7. Putnam, Robert D. Bowling Alone: The Collapse and Revival of American Community. New York: Simon & Schuster, 2000. Reuters. U.S. Recession Is Over - Poll. Washington, D.C., 12 October 2009. Rudolph, Thomas J. and Jillian Evans. "Political Trust, Ideology, and Public Support for Government Spending." American Journal of Political Science, Vol. 49, No. 3 (2005): 660-671. Uusitalo, Paavo. "Monetarism, Keynesianism and the Institutional Status of Central Banks." Acta Sociologica, Vol. 27, No. 1 (1984): 31-50. Read More