– August 25, 2020
pelosi schumer

I am often asked why I come across as someone who is opposed to government intervention even in times of crisis. This question reflects a profound misunderstanding of my position. In cases like this I often think about the lyrics from Russ Roberts and John Papola, Keynes vs. Hayek round 2. The song is about the response to the Great Recession but it applies to other events.

 [Keynes]

So what would you do to help those unemployed?
This is the question you seem to avoid
When we’re in a mess, would you have us just wait?
Doing nothing until markets equilibrate?

[Hayek]

I don’t wanna do nothing, there’s plenty to do!
The question I ponder is: Who plans for whom?
Do I plan for myself, or leave it to you?

Proponents of a large government response during crises believe in the “leave it to you” route in the name that during crises, centralization can be beneficial. Unfortunately, even though I fully acknowledge that in times of emergencies, governments at different levels can play a positive role, in most cases, government officials and institutions do a terrible job at solving problems, even when it is their job to do so.

There are different reasons for that but here are the main ones. During good times, government officials suffer from systematic decision-making failures. Unfortunately there is nothing to indicate that the problems that plague their response during good times are gone during bad times. In addition, during crises, government officials typically respond with a one-size-fits-all mentality, without ever missing an opportunity to expand their already gigantic powers. 

What’s more, by the time an emergency occurs, governments are so big and overextended that they do not have what it takes to respond appropriately. These patterns of behavior from politicians is why I often respond to all proposals for government intervention with skepticism.

Consider the COVID crisis. Because of this novel virus, economies shut down, people were dying, and a wave of panic swept in. Government officials, especially at agencies allegedly dedicated to prepare for crises like this one, were not ready at all. Misinformation ran rampant. 

Just to cite one example, one day we were told by officials at the Centers for Disease Control that we don’t need masks, the next day were told we should use them, the day after that we found out that those CDC officials knew full well we should be using masks all along but they didn’t want the general public to know for fear that a popular run on masks would reduce available supplies for health-care professionals. 

After all this ineptitude and deceit, people are surprised that some Americans are skeptical about the use of masks. And while, when it comes to the usefulness of wearing masks, I do not share this skepticism (among other things I believe that wearing a mask is our ticket to living a somewhat normal life outside of our homes, in addition to the fact that I believe them to be valuable in a pandemic), I find it uncharitable to mock those who take the messaging on masks with a grain of salt now. 

On the economic front, legislators started immediately to talk about stimulus spending, and the need for massive government expenditures. Too bad we were already deeply in the red with deficit spending close to breaching the $1 trillion mark after 10 years of economic growth. Adding massive amounts of spending to large deficits and an explosion of the unfunded liability was a sad prospect to contemplate—even when one agrees that in times of emergencies there can be legitimate reasons for Uncle Sam to spend a lot.

How did that happen? Because politicians are not to be trusted with taxpayers’ money. Many like me have warned that one of the many reasons to reduce our budget deficit and debt is so that the government can deploy some spending in a time of crisis. Uncle Sam and the legislators that hold the power of the purse refuse to exert even a modicum of fiscal discipline during good times. 

There is no spending they don’t like. Also, even if both parties disagree somewhat on what to spend money on, they always end up making a deal that includes more money for both sides. People, then, should forgive me for being skeptical that the irresponsible leaders in times of peace will lead us in the right direction during hard times.

In addition, when the crisis hit, these same legislators who have refused to reduce spending during good times always fall back on the only response they seem to know when an economy is in recession: flood the economy with spending and newly created money. Never mind that, even if I were a Keynesian, I would know that in this particular crisis that’s not the right way to go since there is no point stimulating an economy in which people are asked not to consume and producers are prevented from producing.

Even today, with the economy reopened to a large degree, legislators can’t seem to devise policies that might actually help people. The constant talk about how stimulus spending is necessary to prop up the economy is disappointing. For one thing, even someone who is favorable to the proposition that taking money out of the real economy and running it through the political process before spending it yields a larger economic bang for each buck spent should be disillusioned right now after looking at the economic literature on the issue.

In a recent piece, my colleague at the Mercatus Center Jack Salmon and I found that “most of “the empirical literature on fiscal multipliers conducted since then (2009) has found economic multipliers resulting from additional government spending ranging from a lower estimate of around 0.2 to an upper estimate of around 0.9.” We go on to explain that in “(p)ulling the results from two dozen academic studies, we calculate an average multiplier at the low end of 0.31 and an average multiplier at the high end of 0.66.”

In addition, while academics do find instances where you can get a higher economic return on the money government spends (at least if you ignore the fact that taxes must be raised in the future to pay for that spending), conditions in the United States are not now conducive to high returns on government spending. The reason is that we are too much in debt and we have done the stimulus-spending dance too many times.

And that’s where, I guess, people may have a point about my skeptical attitude towards government. No matter what legislators do, even when they’re incredibly well-intentioned, the machine within which the decisions are made is by nature political and, hence, subject to special-interest influences, knowledge limitations, and path dependencies.

The path dependency issue with government decision-making is an issue that I just started to explore. It is as if no matter what kind of crisis hits, government officials only have a few tools in their toolbox. They always fall back on the same “solutions” they have implemented before. These tools are spending money, printing money, bailing out companies, restricting freedom, and otherwise expanding government’s powers. These are the “tools” used during pandemics, recessions great or modest, after terrorist attacks, and in the wake of natural disasters such as Hurricane Katrina. 

Just to cite one example, look at the Payroll Protection Program (“PPP”). While it may have looked like a new idea, legislators couldn’t think of implementing it without using the Small Business Administration—an agency renowned for its failure to respond effectively to disasters. Why? I think it’s because they were designing a program for “small businesses” so they couldn’t think outside of the bureaucratic box labeled “Small Business Administration.”

Legislators also fell under the influence of special interests when they designed PPP, caving to the demand that large restaurant and hotel chains be considered “small.” And, of course, the program also suffered from a serious one-size-fits-all mentality that pretty much guarantees that those firms that knew how to play the government bureaucracy game, and have enough manpower to fill out the applications, would get relief while those without the connections, manpower, or knowledge would be left out to dry.

I could go on and on and list many more failures of government. But the bottom line is that all these failures are impossible for me to forget when I am promised by the same politicians who have been in power for decades that this time around things will be different. They sadly never are. 

Veronique de Rugy

Veronique de Rugy

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. She received her MA in economics from the Paris Dauphine University and her PhD in economics from the Pantheon-Sorbonne University.

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