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.