The Economic Origins of Anti-Government Ideology

BY: SAM HUGHES, op-ed columnist

Anti-government ideologues have sprouted up around America and the world with their belief that any public-policy action infringes on individual liberty and the free market. The people who argue against government action in any situation are fundamentalists. They may have come to these beliefs independently and genuinely, but I would argue that they are, instead, the disciples of an established tradition.

The modern vein of this anti-government thought, I think, is based on a Classical economic model of the real world. This model was a philosophical one at its core and was developed in the 18th and 19th centuries. To understand why they believe what anti-government crusaders believe, it is important to understand the Classical model.

Like any other economic model, the framework is that total production (GDP) equals consumption (C) plus investment (I) plus net government spending (G) plus [exports (X) minus imports (M)]. Classicalists believe that total production is fixed. Period.

Because production is fixed, any change in one of the factors will be perfectly and immediately offset by a change in one or more of the other factors. The primary mechanism for the perfect adjustment is shifting interest rates. Classicalists believed that an increase in government spending would elicit a perfect increase in interest rates. The increase in interest rates would rein in consumption (C) and investment (I). This is the “crowding out” effect.

The secondary mechanism for the adjustment is that they assume consumers are perfectly rational. This means that consumers see a rise in government spending, or government deficits, and they predict that this will result in an increase in their future taxes. They perfectly predict how much their future tax burden will increase, and reduce their consumption accordingly.

When market fundamentalists say that the government cannot create jobs, this is what they mean. They think that any jobs created by the public sector will be perfectly offset by job loss in the private sector. This, I believe, is the traditional foundation of the conservative anti-government ideology that has dominated over the past thirty years. To their credit, these predictions have some applicability when the economy is functioning properly.

Unfortunately, we are in recession, where the economy is not functioning properly. Large government deficits have NOT led to skyrocketing interest rates, and consumer spending did not decrease because of future tax expectations, it decreased because millions are jobless or losing their homes.

These anti-government ideologues should be losing credibility as the real world chews up their model and spits it out.

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One Comment

  1. The problem with this critique is that the Federal Reserve has entered the market and pegged interest rates at artificially low rates. While the Classical model may not be an accurate modern representation of our economy, it isnt exactly appropriate to critique the lack of interest rate fluctuations when they are pegged at artificial levels. While the Fed controls mostly short term rates, a brief look at Europe where they have been running large deficits and they do have a large welfare state, they have seen their interest rates rise. Again, not necessarily by the ECB, but rates to lend between banks and CDO rates to insure govt bonds have skyrocketed. For example, the LIBOR:OIS spread has increased over 100% over the past year, despite falling 32% since the beginning of the year. These are significant moves. And while Europe is not the US, and the US is not Europe, encouraging more government intervention is certainly a page out of their books. If we pursue similar policies as Europe, one has to question what the ultimate end result will be.

    Additionally, I do not think the philosophy is necessarily influenced by an economic model, but rather a philosophy. If one believes that you, and only you, have the rights to the fruits of your own labor, then the means of funding big government “recovery”/”spending” programs becomes a natural perversion of the law as it is done through income taxes. I believe in small government because I do not believe the government has the right to plunder Matt to pay John. Furthermore, if government spending is facilitated through large deficits inflation and currency depreciation is always a concern and in my opinion is the most heinous form of taxation. While inflation has remained low for now as measured by the CPI, gold, oil, and food commodities have shot through the roof.

    Lastly, the philosophy stems from the belief that government was the primary cause of the economic crises. If artificially low govt rates, govt over spending, and govt pushed housing initiatives created incentives that over cooked the market, why would one demand more govt spending, lower rates, more deficits, and more govt intervention?

    I have always found the Recession of 1921 to be interesting food for thought. We had double digit unemployment, double digit deflation, and a inactive Fed (by modern standards). The Harding administration decided to do nothing, it let the economy run its course and we saw a recovery in a year. Andrew Mellon and Harding then responded by cutting taxes and saw their revenues increase and a period of large growth take hold all while running large surpluses. Fast forward to 1929-1930 and we again have a similar scenario. Double digit unemployment and double digit deflation. Hoover responds with deficit spending, unbalanced budgets, and public works programs. With no recovery insight FDR takes control and triples Hoovers initiatives. We get mass public works projects, price controls, and huge deficits. This recession turns into a depression, lasts 10 years and takes until 1954 for the stock market to recover. Take it for what it is worth to you, but I always found this to be interesting.

    Thanks for the article!

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