Big Government Myths Are Undermining Democracy and America's Future

When the FBI says there is an epidemic in fraudulent mortgages loans and no one in Washington does anything about it -- which is what happened in 2004 -- this nation is no longer being governed the way it once was. Democracy is failing.
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Cross-posted from New Deal 2.0.

We have had two towering examples of the failure of unregulated private enterprise before us, but still the push-back against government intervention continues. The oil rig explosion in the Gulf and the collapse of credit around the world in 2008 have demonstrated more than at any time since the Great Depression the importance of bold, intelligent government. Yet we are treated time and again to all the clichés about the merits of unrestrained private enterprise and the lurking danger of government. The Glenn Beck caricature is one thing. But there is plenty of push-back from old-new Democrats, Third Way advocates, and, of course both moderate and right wing Republicans.

The recent record of unregulated private enterprise is deeply disturbing. Apparently, the more you are paid by your corporation, the less of its workings you are supposed to know. Before Congress, Tony Hayward pleaded ignorance about BP's safety measures or even the current strategy to contain the tragic damage. He makes $6 million or so a year.

In May, Bob Rubin, who made $15 million a year, eagerly admitted to the Angelides Congressional investigatory committee that he did not know Citigroup (where he was effectively running things) had $43 billion of mostly-toxic collateralized debt obligations on its books until the fall of 2007, when the firm was forced to take tens of billions in losses. His boss, Chuck Prince, who took over as CEO of Citigroup following Sandy Weill (at a time when the firm was the largest banking operation in the world), said he did not realize they would lose so much money. He left in 2007 with about $80 million, pleading ignorance of the complexities of securitization and therefore any responsibility for it, or so it seemed. Stan O'Neal, the bright investment banker who tried to turn Merrill Lynch into a hip, super-profitable investment bank by issuing more collateralized debt obligations than anyone else, said he had no idea the losses were that high. He left with $160 million.

When Robert Reich suggested that the federal government intercede more in the matter of the oil fiasco on a recent Sunday talk show, columnist George Will reflexively said we don't need any more government run-companies. Has he seen the news?

Of course, there are many who blame Fannie Mae and Freddie Mac for the credit fiasco, but this is nonsense. They had a part, but the private sector sold the majority of the subprimes mortgages by far, and basically all of the highly dubious, if not outright fraudulent, collateralized debt obligations -- without government guarantees. More to the point, Washington, in thrall to the free market ideologues, had long ago turned Fannie and Freddie into private, profit-making corporations. They paid their CEOs millions-in some case of tens of millions. Surely if they were private, they'd be run more efficiently, went the thinking.

Markets can work if prices are transparent and conflicts of interest minimal. But even then, especially in financial markets, regulation is needed to mitigate herd behavior, outright self-interested fraud and the illegal circumvention of rules.

Why are these concepts so hard to grasp? The anti-regulation political regime first gained momentum under Jimmy Carter (Richard Nixon also did some deregulating, but in fact more regulating). It went full speed ahead with Ronald Reagan, who gutted the National Transportation Safety Board, the Food Safety and Inspection Service, the Consumer Product Safety Commission, and the Occupational Safety and Health Review Commission. Anti-trust bashing was all the rage under Reagan. Labor laws were poorly enforced and fines for infringements were minimal. He cut the staff of the Federal Trade Commission and the anti-trust division of the Justice Department by half. George W. Bush was absolutely brilliant at putting people in charge of the regulatory agencies who wanted to defang and incapacitate them.

Yet supposedly reasonable people still believe that somehow America was saved by the government push-back in the 1980s and 1990s. I read this in middle of the road analyses all the time. Bill Clinton's announcement that it was the end of big government defined the new Democratic Party, and still represents good common sense to many. In fact, government never got substantially smaller-under Reagan or even Clinton. And, above all, America was not saved. There was thankfully a technology revolution in the 1990s, but much of the prosperity was stimulated by wildly overpriced stocks and Alan Greenspan's crisis-induced interest rates cuts. The Asian financial crisis and Russia's default had as much to do with Greenspan's supposed prescient interest rate reductions than faith in the New Economy.

It should be clear to all readers that there is no serious evidence that so-called big government reduces growth or GDP per person. Some economists make the claim when comparing, say, European nations to the U.S. But the statistical work never holds up under close examination. Others show just the opposite. If the issue was as settled as so many claim, there would be no ambiguity about the evidence. In fact, the evidence shows no relationship at all between the size of government and slow growth.

When the FBI says there is an epidemic in fraudulent mortgages loans and no one in Washington does anything about it-which is what happened in 2004-this nation is no longer being governed the way it once was. Democracy is failing.

Theories were developed in these years, led by economists like Milton Friedman, Ronald Coase and James Buchanan that government was basically self-interested business at work, only far more inefficient. Coupled with anger and frustration in the 1970s, Americans turned against government. The tax revolts, resisted as late as 1973, took hold by the late 1970s.

Such ideology is undermining America's future. The reflexive belief that government is bad on the face of it, and business good, is not supported by history or theory. After the last two years, if government is not recognized as a premier agent of change and the main coordinating institution of the economy, the creator and enforcer of laws and property rights, the principal guardian against abuse and protector of social equity, it will be one of the landmark failures of governance in our history. A great democracy is being usurped. Pundits write with no sense of history, theory or skepticism. Washington remains subject to wealthy influence. Two hundred years ago, liberal politics once fought an autocratic state. Now liberal politics must fight a powerful private sector. America needs balance, not ideology. The public discourse is now simply wacky. Balance, not ideology.

For more on this topic, join me at the Hamptons Institute/Roosevelt Institute symposium July 16-18.

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