The argument used by liberals since the New Deal is that a bigger federal government is a necessary aid to the poor and average American. It is as if government and the private economy represent two, mutually opposed constituencies. The economy serves the rich and powerful, and government represents the average person. And a bigger and more active government is needed to help the average person, and particularly the poor, hold their place in society. Therefore, anyone who opposes a growing and more powerful federal government opposes the interests of the poor and average American. This, anyway, has been the liberal argument for the past 80 years. But when actual government programs are examined, the facts contradict the argument.
The expanse of government has not always translated into an improvement in the lives of average Americans. This is not to say that all government is bad or ineffectual, or that government needs to be broken down to some nineteenth century model, which would be both impossible and unwise. Rather, this essay questions the liberal claim that government constitutes the only or the best remedy for many concerns facing the average American.
Big Government Responds to Big Power
The tax code presents a useful example of how big government inevitably favors the more powerful. Higher tax rates, needed to finance bigger government, are almost always accompanied by loopholes that the wealthy and their lobbyists are most able to exploit.
Consider, for instance, the tax increases implemented under former Illinois Governor Pat Quinn. A $2 billion tax increase, the largest in Illinois history, was the Democratic legislature’s remedy for a severe budget deficit. But as soon as the tax increase went into effect for all Illinois businesses, the largest and most influential corporations started cashing in their special tax breaks. The small and medium-sized business that couldn’t afford lobbyists, however, were stuck paying the higher tax rates. So the one percent of politically connected businesses prospered at the expense of the 99 percent.
In its political dialogue, the Left denounces big business, so as to curry favor with the average person. But in practice, the Left often rewards and strengthens big business. The Dodd-Frank bill is a classic example. By conferring special benefits on the “too big to fail” institutions, and by imposing huge regulatory costs that small companies are unable to afford – thus giving big corporations a competitive edge – the bill puts big government in partnership with big business.
Liberals do not just regulate business, they subsidize it – or at least, the favored businesses. Obamacare’s individual mandate forcing people to buy a product from a private industry, for instance, is a big boon to insurers, just as Dodd-Frank’s “too big to fail” is a boon to the big banks receiving the government’s seal of approval that enables them to get favorable treatment from creditors because they will be seen as protected by the government. It also puts the U.S. taxpayer in the role of bailing out the biggest financial institutions, no matter how risky their behavior. Large institutions can pursue abnormally high returns with less concern for the risks that accompany such investments, since they know the government might ultimately assume that risk. Similarly, the Affordable Care Act promises open-ended subsidization of insurer losses from policies sold on the law’s federal and state exchanges. Thus, insurers can take more risk and cut their premiums to gain market share, because they know the federal government will subsidize any large losses they incur. Consequently, the Affordable Care Act (“ACA”) forces taxpayers to subsidize large insurance companies.
Excessive regulation is often the most effective form of crony capitalism. After passage of Dodd-Frank, JP Morgan Chairman Jamie Dimon said that regulation was good for his bank because it builds a “bigger moat” against competition. Although the regulation would burden JP Morgan, it would be a much greater burden for smaller banks with less capacity to bear those increased regulatory costs.
Maneuvering through costly government rules may be feasible for large companies, but the high compliance costs make it difficult for smaller business to keep operating or to even get started. And just as high compliance costs are more easily shouldered by large firms, the biggest corporations are the ones best positioned to exploit loopholes and wield the most influence in an ever-growing regulatory state.
The Cato Institute estimates that the government hands out $1.25 billion per year in corporate welfare, with some of the biggest beneficiaries being companies like Boeing, Xerox, IBM, Dow Chemical and General Electric. The Overseas Private Investment Corporation is a federal agency that subsidizes U.S. companies with taxpayer-backed financing when they set up business overseas. But this financing often goes to politically favored activities and firms. Likewise, the Export-Import Bank distributes more than 90 percent of its $14.5 billion in loan guarantees to a dozen large corporations. And while Obamacare was advertised as being a help to the ordinary citizen, it caters to the big interests that promoted it. According to the House Oversight and Governmental Reform Committee, White House aide Valerie Jarrett assured health insurers that they would get nearly 100 percent of what they sought under Obamacare. Indeed, it was the big insurance companies and big hospital chains that lobbied heavily for the ACA.
The Economic Distortions of Big Government
Not only does increased government spending not produce the kind of economic benefits boasted about, but it can often have a negative effect. As the economist authors of An Inquiry into the Nature and Causes of the Wealth of States demonstrate, the states with the fastest economic growth are the ones that tax and regulate the least. Government involvement often depresses the kind of economic growth needed far more by the poor and working class than by the rich, who already have their wealth.
During the escalating government involvement of the Obama era, the Americans most in need of economic advancement have suffered the most. Households headed by single women saw their incomes fall by roughly 7 percent. Young people under the age of 25 experienced a decline of almost 10 percent. Black heads of households had their income fall by almost 11 percent. The incomes of workers with a high school diploma or less fell by approximately 8 percent. This is a dramatic reversal of the progress these groups experienced during the expansions of the 1980s and 1990s.
To spur economic growth, despite the growth-suppressing policies of the Obama administration, the Federal Reserve conducted upon its Quantitative Easing program, involving an unprecedented purchase of government bonds on the open market so as to keep interest rates near zero. Not only did this bond-buying program not produce vibrant economic growth, but it hurt many average Americans, particularly senior citizens. Because interest rates went to near-zero, and because senior citizens depend on interest from savings to fund their retirement, households headed by seniors 75 and older lost on average $2700 in annual income over the past seven years.
However, the program was a bonanza for Wall Street, fueling a stock market rise that ballooned the wealth of rich investors. The QE program also benefitted the big banks, which enjoyed lowered loan costs, huge gains on the values of their securities holdings, and fat commissions from brokering most of the Fed’s QE transactions. Consequently, during the Obama era, Wall Street has had its most profitable years ever. And the biggest banks have become a virtual cartel, with just .2 percent of them now controlling more than 70 percent of U.S. bank assets.
An Example of Well-Intentioned Policies With Damaging Consequences
Housing policies exemplify how big government actions, although advertised with the best intentions, can harm those who are most vulnerable.
Real estate development restrictions, for instance, work to the disadvantage of the poor. By decreasing the supply of affordable housing, these restrictions allow slumlords to jack up rents even on their dilapidated properties. Not surprisingly, housing shortages are most acute in liberal cities. UCLA economist Matthew Kahn found that the higher a city’s liberal vote share, the fewer housing permits it issues. There may be a host of reasons why a city enacts such development restrictions, but the unquestioned result is that they are detrimental to the poor. In communities controlled by the elite, the adoption of these restrictions have made the construction of new housing all but impossible for anyone except the affluent.
Federal government housing policies were a significant cause of the 2008 financial crisis. It is unquestioned that a bursting of the mortgage bubble, fueled by subprime mortgages, led to the financial crisis. The question is: who was responsible for generating those unsustainable mortgages?
By 2008, more than three-quarters of all subprime mortgages in the U.S. were held by Fannie Mae, Freddie Mac and government agencies. This was because Congress had pushed Fannie and Freddie to increase their lending to low-income borrowers with subpar credit ratings. The goal was to expand home ownership among low-income groups, but the government did this by abandoning traditional underwriting requirements and pushing people into homes and mortgages they couldn’t afford. It was government that led the charge into subprime lending and wound up holding the vast majority of the high-risk loans, which ultimately went into default, setting off the financial crisis that ended up hurting the poor in two ways. First, it took away the homes they had been lured into but could not afford; and second, by leading to the Great Recession, it took away their jobs and income. As Democrat Barney Frank admitted in 2010: “It was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.”
Ever since the New Deal era, and particularly since the Great Society era, a bigger and more active government has been billed as a necessary aid to the common person. The underlying assumption is that only the public sector can offer real opportunity, as well as a real antidote to the oppressive centers of big power in society. As this essay argues, however, such an automatic assumption is not only unfounded, but is often contradicted by the evidence.