Did Small Government Cause Our Current Problems?

[Mike]

Comment: Robert Higgs is the economist who explained:
-FDR did not get us out of the Great Depression
-WWII did not get us out of the Great Depression
-The Great Depression probably ended in 1946.

In this piece he tears up the notion that "government is small" and "there hasn't been enough regulation"

http://mises.org/story/3694

Did Small Government Cause Our Current Problems?
Mises Daily by Robert Higgs  | Posted on 9/9/2009 12:00:00 AM

As soon as I saw the headline of an August 10 article by financial columnist Peter Cohan, I knew that something was terribly wrong. It reads: "How did the politics of small government lead to big government bailouts?" This is akin to asking, How did the extinction of the elephants lead to Barack Obama's election as president? If you make a claim of the form "A caused B," but A never happened, then you are wasting your time by delving into the historical details of a bogus relationship.

Yet we continue to see one example after another of what suspicious readers may be tempted to view as the Big Lie: that deregulation or other obliging government measures caused the present economic mess. I won't go so far as to characterize this claim as a Big Lie. Although some of its purveyors, acting out of partisan motives, surely know that they are blowing smoke, others may simply suffer from economic ignorance, analytical confusion, or loss of historical memory. In any event, the public is ill-served by commentators who purport to speak with authority about our current economic troubles, yet merely peddle this worse-than-sophomoric tale.

The Cohan article in question consists of so much nonsense that a full critique of it might be enough to compose a student's senior thesis. But the part that interests me right now is the claim that

    the idea of small government … helped create the ineffective regulatory agencies which allowed all kinds of questionable practices to thrive in American business, especially in the world of finance. By helping create a record debt bubble, which thrived in an era of weak regulatory oversight, small government nearly ruined the global economy last fall.

So, there you have it in plain English. To repeat: "small government nearly ruined the global economy last fall." Cohan spares us any evidence that we actually had a small government at any time during the past 25 years. I would be especially interested in such evidence, inasmuch as I have written a number of articles and books brimming with evidence that in fact the governments of this country at every level were growing in size, scope, and power during those years.

Like Cohan, those who continually blame insufficient regulation for our present plight offer little or no evidence. They rely instead on the implicit assumption that if only the regulations had been much stricter, the bankers and other business-sector malefactors never would have perpetrated their evil deeds. This faith in the regulators is touching, to be sure, but it is also extremely naïve. We now have — and long have had — miles of regulations on the books and legions of regulators at work in scores of government agencies. What specific power did they lack? And had they been given even greater powers, budgets, and staffs, what enchantment would have transformed these ostensible guardians into smart, dogged champions of the public interest, rather than the time-serving drones and co-conspirators with the regulated firms that they have always been?

Somehow, no matter how many regulations are created and how many regulators are put on the government payroll, when these rules and enforcement agents fail to prevent a disaster, many people's response is to propose that the government write more regulations and hire more regulators. If these advocates of expanded government intervention had been in New Orleans as it was being submerged under Katrina's floodwaters, they no doubt would have proposed that the Corps of Engineers dynamite the remaining levies — to prove that they favored "doing something."

"Ironically," writes Cohan, "another Republican, Ben Bernanke … decided that in the midst of a catastrophic economic collapse … the prescription for the problem was the biggest government in American history." And thank goodness, too, he opines, because owing to all of the wonderful mitigation that the Fed's unprecedented actions have produced to soften and reverse this inexplicable, out-of-blue episode of financial panic and recession, "there is a good chance that historians will look back on Bernanke as the man who saved the world."

I can't speak for all historians, but I can guarantee that no such story will be disseminated under my name. On the contrary, by taking into account how the government and the Fed created necessary conditions for the financial bubble that burst last September — as many competent analysts have already shown — notwithstanding Cohan's disregard of their findings — we quickly appreciate that Bernanke's supposed world-saving would never have been deemed necessary had he and others in high government places not done so much to place the world in jeopardy in the first place.

Never one to linger over a single piece of nonsense when another beckons, Cohan proceeds without transition to the question, "How do we keep this from happening again?" To which his amazing answer is "The most important way is to change how bankers get paid." Oh, sure, that will turn the trick. Never mind the government's countless measures from the 1930s onward to steer money into mortgage loans to borrowers with little likelihood of repaying them. Never mind the massive efforts of the government-sponsored giants Fannie Mae and Freddie Mac to create secondary markets for rotten mortgage-related IOUs galore. Never mind the Fed's pumping up of the real-estate bubble by rapidly expanding credit and holding interest rates at absurdly low levels for years on end. Never mind all of this and a great deal more. Simply change how bankers get paid, and the sun will shine on us again.

"We [by which Cohan seems to mean the government] need to change banker's pay so that they only get rewarded if their risks are profitable," he declares, "and punished if they lose money." Some readers might find this idea appealing, if they don't spend much time thinking it through. In truth, however, the government already plays too large a role: if the government and the Fed did not stand in the background, ready and willing to bail out reckless bankers, the bankers would act a great deal more prudently, as would their boards of directors when deciding how to compensate the managers. Moreover, I venture to remind our financial guru — who is described as the president of a consulting and venture-capital firm, a management teacher at Babson College and the author of eight books — that how bankers get paid lies properly within the domain of the banks' boards of directors. It's really none of my business, or his.

In contrast, how the government and the Fed act is my business because they purport to act on my behalf, and even if they didn't so purport, they still act in many ways that harm me. So I'm entitled to hold them to account for their actions. As long as the Cohans of this world continue to blame private actors and "the idea of small government" for the economic disasters that the government and the Fed produce, however, we have little chance to clarify what can — and should — be done to remedy our plight and preclude serial repetitions of such destructive actions.

Not content with having embraced several stupendously erroneous and misguided ideas, Cohan plows to an equally dim-witted conclusion by declaring that besides setting the compensation of bankers, the government should establish "an independent government agency to create financial statements for companies and money managers." Sure. Let the government keep the accounts. After all, the government has a flawless record of keeping honest accounts and scrupulously avoiding multi-trillion-dollar Ponzi schemes such as Social Security, and pie-in-the-sky promises such as Medicare, which stretches to the limits of the known financial universe.

The Department of Defense, which since 1994 has been required by law to perform an annual financial audit, has yet to perform one. Each year a DoD accounting functionary dutifully testifies before Congress that the department's accounts are in such a mess that its records cannot be audited. Is this the kind of financial-accounting proficiency we want to impose on the private sector? Cohan thinks so.

Got a problem? Just give the government even more power, and our friendly, competent rulers will take care of everything. I shudder to think that columnists may actually get paid for spouting such childish twaddle.

Robert Higgs is senior fellow in political economy for the Independent Institute and editor of The Independent Review. He is the 2007 recipient of the Gary G. Schlarbaum Prize for Lifetime Achievement in the Cause of Liberty. Send him mail. See Robert Higgs's article archives. Comment on the blog.

This essay originally appeared on Independent.org.

[Mike]

http://www.goldinvestor.com/media.html

Same Old Raw Deal from Uncle Sam
Professor Burton Folsom says that FDR’s policies were a failure and the propaganda has brought America to a state of bankruptcy. Hour 1 >> Hour 2 >>

Every Tuesday Jay Taylor puts out an MP3.  'fessor Burton is from Hillsdale College in Michigan.  The college refuses all federal money and doesn't abide by any federal mandates.  This MP3 is about FDR's Raw Deal.  What I liked most about this is:
1) the rejection of the idea that WWII got us out of the Great Depression. 
2) the assertion that the Great Depression ended in ~1946.

What I liked least about the cast is the Professor's dwelling on the role of high taxes in causing the Great Depression.  I know it is true.  But I think the role of debt is more important. 

*******
Next week Jay Taylor will be interviewing someone about the Argentine & Soviet collapses.  It should be good.
******
 

[opsec]

This guy sounds like he knows his business. Bump this thread to the top of the forums when his interview on the Arg. + Soviet collapse

[Atash Hagmahani]

What's amazing is how many people believe that WW2 got us out of the Great Depression, who actually lived through it, and rejected the evidence of their eyes.

John Pugsley says that he can remember clearly that at the height of the Depression, you could buy chocolate bars and silk stockings, but during the war those were totally unavailable, and a great many fairly ordinary items were rationed. So standards of living actually fell.

What I hear a lot of people counter is BUT DURING WW2 THERE WAS FULL EMPLOYMENT! Ah, but there was not. Instead there was wholescale replacement of one group of men who were drafted, with women and other men who were not. Being drafted is NOT employment even if they're feeding you and giving you a place to sleep.

But perhaps that is part of the problem. Many--most?--people prefer a hell where someone else takes responsibility for the decisions, over heaven and personal responsibility for making your own choices.

As it is now, most people are not really all that desperate, EXCEPT INSOFAR AS THEY THINK THEY ARE. Nobody needs to commit suicide or take any other rash action to deal with the current situation, but it does call for some serious choices that are outside of their comfort zone. Better to move in with the in-laws than have WW3 "save" us.

As for "small government"--that's easy: deregulation is not "small government".

The real issue is whether government regulation is all that effective in terms of accomplishing what is promised. The track record is not all that great.