On The Small Matter of Government

Among rather a lot else, the first Presidential debate included a lengthy discussion of Senator McCain’s continued embrace of tax relief, specifically tax relief as a means of stimulating the economy. “Tax cuts are the best recipe,” said he, as though this were a declarative statement of fact and not an ominous homage to the tepid policy responses of two consecutive Presidents Bush. Still, the idea has traction with a substantial subset of the electorate (including many clever folks on the Editorial Staffs of the Wall Street Journal and the National Review), and thus, if for no other reason, it would seem topical to revisit the question of the proper role for government in a modern, mixed-industrial society like ours.

To begin with, few professional economists are prepared to argue the Ayn-Rand-extremist view that all modes of government intervention in the behaviors of markets are inherently pathological. Even Gregory Mankiw, the economic adviser who many say was forced to resign from the present Administration in disrepute after touting the virtues of outsourcing, argues in the first chapter of his own college-level economics textbook that “governments sometimes improve market outcomes.”

All market transactions include both private and social benefits and both private and social costs, and while the market does an excellent job of appropriately valuing the private aspects of both sides of this ledger, the social consequences pass through its membrane completely unaccounted. When the divergence is big enough (say, for example, when a hog rendering plant wants to open across the street from an orphanage), the government steps in to force internalization of the external benefits and costs. I usually tell my economics students that the next time someone tries to tell them how much better off the markets would be without a government, they you ask that person if they think football would be a better game without referees.

As some people already know, Senator McCain has been no friend to this permanent role for government during his tenure in Washington, tireless as he has been in his efforts to repeal government oversight authorities and deregulate entire industries during his various episodes as Chair and Ranking Member of the Senate Commerce Committee.

But even if Mr. McCain were to suddenly reverse his deregulatory course both in action, as well as in words, this belated getting-of-religion on the matter would have precious little impact on the tax-relief centerpiece of his economic plan, precisely because oversight is an acyclical role for government, while Mr. McCain is proposing to use tax-relief as a counter-cyclical measure to encourage renewed spending in the near term. There isn’t one, but two roles for government in our modern mixed-industrial economy.

The good news for McCain is that the verdict on conservative stabilization policy is decidedly less straightforward. Few can argue in good faith that Ronald Reagan’s approach to the matter was anything other than unambiguously beneficial for the time and circumstances in which he served (and never mind the inflation-fighting contribution of Paul Volcker at The Fed, over whom Mr. Reagan had no jurisdiction). The tax and regulatory burden of the late 1970s was an added disincentive to business investment at precisely a time when disincentives to business investment could be accidentally stepped in if a person weren’t careful when walking down the sidewalk.

But something else was true in the late 1970s, that isn’t true now: the government had just concluded the thick end of three decades spent investing a substantial sum of money on job-creation and human-capital development, much of it with semi-permanent effect on infrastructure.

Travelers to the developing world are in the habit of noticing with jarring forcefulness not the host country’s inability to embrace free enterprise–free enterprise is alive and well in places like Bangkok and Lagos and Port Au Prince–but rather the stunning absence of our comfortably taken-for-granted infrastructure: You can’t take a train, you can’t take a bus, you can’t drink the water, and if you did, there’s no health care. These are the things that suffer when a candidate for the Presidency pledges to slash the nation’s already gutted tax code, and these are the things that show up in the national consciousness as exported jobs, outbreaks of T.B, and collapsed bridges in the host cities of its National Political Conventions.

If it is true that this second role for government is fluid with the changing times, as I would seem to have argued, then it is equally true that this is hardly the time for us to start paring down our investments in education, transport, and health care. Just as the American business owner needed to know that his return on investment wouldn’t be taken from him in 1979 before deciding to build an addition on his factory, so today he must know that the factory will be reachable by his employees, that they will show up healthy and trained and ready to work, and that the products he produces will have a vigorous market full of prosperous families with  roofs over their heads.

In the final analysis, Mr. McCain is allowed to believe that these things will somehow arise as indirect consequences of his plan to hamstring the government’s ability to provide them, but he’s not allowed to claim the principles of modern market economics as his justification. Because this time around, they are with the other guy.