Government spending, cargo cults, and rules for growth

Cite this Article
Larry Ribstein, Government spending, cargo cults, and rules for growth, Truth on the Market (August 08, 2011),

When the debate about the debt ceiling and spending gets past name-calling to real issues, it’s about the best path to growth and jobs.  An example of the pro-spending view is James Surowiecki in the current New Yorker:

[T]he spending cuts * * * will likely hit precisely the kind of public spending—on infrastructure, basic research, and defense—from which corporate America reaps great, if often unacknowledged, benefits.

But here’s an alternative take from Andy Kessler in today’s WSJ:

Now that the debt-ceiling gyrations are over, the Obama administration is “pivoting” to its biggest problem—jobs. Unemployment ticked down to 9.1% in July, but the real unemployment rate, including discouraged workers, is still 16.1%. The stock market is not pleased. * * *

Can we agree that throwing money at the problem doesn’t work? The 2009-10 stimulus package wasted more than $800 billion. The Federal Reserve’s frantic quantitative easing, QE1 and QE2, printed money and bought mortgage paper on the street, helping banks and financial institutions recapitalize, but it hardly created jobs—not lasting ones anyway. Sadly, the economy grew at a subpar 1.3% rate in the second quarter instead of the typical 5% rocket out of a recession. What’s missing is not capital, it’s opportunity.

As Otter famously said in “Animal House,” this situation “absolutely requires a really futile and stupid gesture be done on somebody’s part.” Well, at least a gesture that might appear stupid and futile but in reality kick-starts whole new industries and massive job growth. And all it will take is the stroke of a pen.

The idea that some government spending could help the economy at critical junctures is certainly not nonsense.  But the idea that we should continue to look to massive government spending as the only solution, particularly after observing the futility of the massive spending that helped get us into our current fix, approaches the reasoning of a cargo cult:  praying for the great God of government to rain goods on us to make our crops grow.

As Kessler points out, there is an alternative:  less, or at least different, forms of regulation to encourage the private sector.  I disagree with some of Kessler’s specific suggestions (read the article), but he’s definitely got the right idea: that there are legal fixes that could get us more, and more long-lasting, growth and jobs than can billions more of government spending.

Want some specific ideas?  Read Rules for Growth, and especially my and Henry Butler’s contribution on jurisdictional competition as a path to growth (and of course my and Erin O’Hara’s book on this).  Laws encouraging efficient jurisdictional competition could, among other things, ease the regulatory burden on new businesses.  Keep in mind that incumbent firms exercise significant control over political processes.  Exit via jurisdictional choice is a way around that stranglehold.

Want another idea? How about deregulating the practice of law (here’s one approach).  This could not only reduce the significant tax that high-priced legal services impose on business, and particularly on entrepreneurs, but also could open the way to a huge new industry in law-related products and services.

Of course these are just the ideas that one person (me) happens to be researching.  There are many others in such areas as intellectual property that others are looking at.  Common sense suggests that there must be a better way than just dumping more government money on the problem.