Limited Government Is Essential to Economic Growth

We do not know who will be the next President of the United States.  As we opined last week, Republican nominee-apparent Mitt Romney is not likely to win if he doesn’t soon articulate an inspiring message or vision.  President Obama, on the other hand, very well may win re-election with his strategy of pitting the vast majority of voters (90%) who barely pay 30% of personal income taxes, against the much smaller (10%) who pay 70% of all personal income taxes.  Such an outcome, we believe, will set the country on a potentially irreversible path to ever-expanding government, at the expense of sustainable economic growth for the country and its people.

We do not believe President Obama is opposed to economic growth, but we do believe he is staunchly opposed to limited government and he has said as much.  Sadly, he doesn’t seem to understand that he can’t have it both ways.  As the size of the government’s debt (including what the government owes to those who are on, or will be on, social security) continues its steady growth well beyond the size of the entire economy, economic growth will become more and more elusive.  In this respect, his vision of the role of government is fundamentally opposed to what the founders envisioned and gifted to their contemporaries and to their posterity.  They understood that limited government was essential to the growth of the country and its economy.  With all due respect to President Obama, we believe the founders had it right and he has it wrong.

Politicians and economists talk and often write in a very esoteric language. Economic theorems, models and projections consist largely of language that crosses the eyes and numbs the mind.  But people know when they are better off or worse off, or feel things are headed in the right direction or the wrong direction, or whether unsustainable (and unrepayable) debt is okay or not so okay.  Common sense still trumps elitist mumbo-jumbo.

Most Americans understand that when the government grows it requires money to fund that growth and that government acquires that money from those who pay taxes, or by borrowing the money, or by printing the money.  They also understand that when government goes into the capital markets to borrow money, whatever they borrow is less than is then available to the private sector to borrow for expansion of an existing business or for starting a new business.  If government taxes its citizens to acquire the money to expand, then there is less money in the hands of private citizens to spend or save or invest as they wish.  They also understand that when government simply prints money to fund its own expansion, their own money is eventually cheapened or devalued.

Many liberal economists argue that our economy is under performing because people and companies in the private sector aren’t spending. Therefore, they conclude, government must spend in order to increase the velocity of money (the rate at which people spend and cause money to change hands), thereby stimulating the economy.  Well, if we had an Administration in Washington whose top priority was to encourage economic growth, they might have a point.  But we don’t, as evidenced by the President’s sandbagging of the recommendations of the strong pro-growth Commission on Fiscal Responsibility and Reform (Simpson-Bowles), which he himself empanelled.  

In the interest of fairness, the Republicans weren’t much help either, having been thoroughly spooked by Grover Norquist’s no-tax-no way-under-no-circumstances campaign.  Nonetheless, strong support from the President could have tilted the balance among the Democrats on the Commission, three of whom voted against the Co-Chairs’ recommendations. The reader will recall that the Simpson-Bowles recommendations were accepted by a solid majority of the Commissions members with 11 of 18 Commission members voting “aye” but not by the super majority of 14 required.  There is, of course, little chance that the Commission’s recommendations would have made it through Congress, but the President’s very cool reception to Simpson-Bowles, which would have simplified the tax code, lowered individual and corporate tax rates and eliminated a whole host of preferential tax treatments for various special interests clearly revealed his distaste for tax reform other than as a campaign issue.

Concurrently, the Administration has hastily unleashed an orgy of new regulations from every federal agency running into tens of thousands of pages.  Stopping any further consideration of the Keystone Pipeline (until after the election) and effectively putting a hold on any drilling on public lands are all indicative of the low priority economic growth enjoys within this Administration.

When Candidate Obama, just before capturing the Presidency, audaciously promised at an Ohio campaign stop, “we are just…days away from fundamentally transforming America,” he meant it.  It was only his early waste of political capital pursuing Obamacare that derailed that promise.  We now know what that promised transformation would have wrought.

Indeed, given the three years of trillion dollar deficits, breathtaking increases in our national debt, and the avalanche of new bureaucratic regulations, we now know precisely what President Obama’s vision for America is.  It is a vision of big, very big government ministering to the needs and wants of, well, just about everyone with the exception of those who Obama, and those who share his vision, relegate to Wealthyland, somewhere beyond the pale.  We know, of course, that the number of middle-class families who will be relegated to Wealthyland will grow as fast as those who were relegated to AMTland a generation ago.

Government, with a role carefully limited by its very founding charter was, for all practical purposes, unheard of in all of prior history.  The affairs of the body politic were, for the first time ever, left to the body politic. That first-ever meritocracy the founders created unleashed the greatest display of human industriousness and economic growth the world has ever known.

There is, of course, a proper balance between the role of government and the role of the private sector (from which the government extracts its operating revenue). With no government we have anarchy, and with no private sector we have social collectivism.  Both extremes are pathetic organizing paradigms for a modern society.   The ideal government role is no greater and no less than that which is required for private enterprise, private initiative and private investment to safely and fairly progress, while providing a safety net for those who are not capable of participating and progressing in such a society.

We have probably never functioned, beyond that very first generation, at that precise proper balance.  Special interests and politicians from both parties with differing views of what that proper role of government is have tilted the balance one way or the other for most of our history. But, by and large, most historians would, we believe, concur that the body politic in America generally gravitates to the center of the political/economic spectrum. The nation’s comfort zone is in the middle, and when we have gravitated too far right or too far left during our historical odyssey, we have always rushed back toward center.

Many, perhaps most, Americans are, understandably, confused when articulate or charismatic politicians or economists advocate one course of action or another. But Americans have a pretty good inherent guidance system that tells them when the country is tilting too far one way or the other.  The same electorate that overwhelmingly said “no” to Goldwater in one election cycle, overwhelmingly said “no” to McGovern a few years later. Both candidates were too far out of the country’s center-based comfort zone.

President Obama is still, throughout much of the country, personally very popular.  Virtually all polls show, however, that voters’ confidence in his management of the economy is weak and that can be a real (to use an Obama expression) game changer come November.  The country is desperate for economic growth they can believe in (to use another Obama expression).  The president’s policies have so far done little, and promise to do even less, to stimulate impressive growth, not withstanding the lip service his campaign gives to that common-sense objective.  Economic growth must be the over-riding national imperative, and the President doesn’t get it.

By Hal Gershowitz and Stephen Porter


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