Government spending, cargo cults, and rules for growth

Larry Ribstein —  8 August 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.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

5 responses to Government spending, cargo cults, and rules for growth

  1. 

    What would be the consequences if we backed off, went completely laissez-faire? This would require a massive repeal of regulations and their underlying legislation. But the result would be bankruptcies for many banks and lending institutions. Look not on bankruptcy as an end to an enterprise or personal well-being, but as anew beginning, under new rules. Isn’t that just what we need? An incremental adjustment trough the legislative process won’t get us that new start. Case i point: GM. The administration got it reconstituted as an enterprise owned in part by unions and by government. Bankruptcy would have “saved” as many jobs. The Chevys would still roll. Those who entrusted their money to GM management would be out of luck, be they stockholders or vendors. But a new GM could or would rise only if led by wiser management. How about a new USA? China would be left holding the bag on our debts. s that bad? Who would care to loan the US by purchasing its bonds in the future? Only those who saw a responsible management government). We don’t seem to be able to freely elect responsible “managers”, so let it be imposed upon us by those from whom we would borrow.

  2. 
    looking closely 10 August 2011 at 8:22 am

    >>Common sense suggests that there must be a better way than just dumping more government money on the problem.

    First of all, I think it should be obvious to any thinking person that if all you needed to do to correct a recession was to spend gov’t (ie taxpayer) money, then there would be no such thing as a recession!

    By corollary, if gov’t spending were the key to economic success, then the most heavily spending gov’t on earth would also be the most economically successful (eg see France, Communist Russia, etc).

    As to “common sense”, since when is that a feature of gov’t?

    If you’re holding a hammer then everything looks like a nail.

    IE, if you’re a gov’t, then the solution to every problem is increased regulation and spending of taxpayer money. By their nature, that’s what gov’ts do.

    Not only do jurisdictional competition and laissez faire economics not “compute” to statist politicians, in general, they try to do everything possible to squelch both things. As a few recent examples: See interstate taxes on Amazon, refusal of the Obama administration to consider interstate purchasing of health insurance as part of “Obamacare”, etc.

  3. 

    You left out the 800-lb gorilla, Mr Ribstein. With the private sector creating an $11.2T economy, the Federal govt wants to run a $3.8T budget, more than a third. That’s like asking a juggler to start flipping anvils, and that’s before local and state govts take their cut. In a nutshell, our primary issue:

    Back when Kennedy took office and signed an EO permitting govt workers to unionize, 1 person in 19 worked in the public sector. For five decades the left has been growing the public sector (at the expense of all the productive sectors) as fast as it can (the better to offer cushy jobs to their loyal foot soldiers) to the point that we now have 22 million govt workers and 8 million in public education out of a total workforce of 150 million (although that’s been slipping since the Congress went Dem in 07).

    The problem is that all jobs are not the same. All pay taxes, but jobs in the public sector get their salaries, taxes and benefits covered by tax revenue–they are tax consumers. Ultimately, workers in the private sector are the only true taxpayers–they have to earn a salary to pay the taxes to pay the salary to pay the taxes of a public worker.

    Back then, we needed the taxes of 2 earners to cover the public employee. That left 16 out of 19 taxpayers to pay for everything else–Social Security, schools and libraries, satellites, highways and so on. That’s sustainable.

    Now it’s down to 1 in 5, but public salaries and especially pensions are way up. Now it take 3 earners to cover the non-earner. That leaves 1 taxpayer in 5 to cover everything else, and it simply cannot be done. That explains how and why the Dems have saddled us with this enormous debt while feeding us the fictions that the size of government is nothing more than a matter of taste and that a job in the public sector helps the economy rather than burdens it.

    What we have to do in reasonably short order is shift 20-million jobs from the public to the private sector while also keeping taxes low and slashing regulatory oversight in order to rev up the economy to cover those jobs plus another 10 million to take care of the current un- an under-employed. But how do you put tens of millions on a skim-milk diet who already have the cream of Big Gov dribbling down their chins?

    Make no mistake. Yes, the Dems caused this problem, but, hey, they made no pretense about what they were up to. It was five decades worth of worthless Republicans who went along that allowed us to end up in this desperate situation. Time for everybody to trade their worthless Republican (or Democrat) politicians in for the new breed of Republican willing to do the heavy lifting to “balance” the government and restore us to enterprise and prosperity.

  4. 

    how about stop adding regulations which impede the economy at the rate of about 10 billion new job killing regulations A MONTH ?

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