Issues analysis
Exposing the myth: bigger government not an ally of the average person--Part I
Patrick Garry, RenewAmerica analyst
January 19, 2015

The argument used by liberals since the New Deal is that a bigger federal government is a necessary aid to the poor and the 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.

Modern liberalism has used the poor and average American to justify the continued crusade for a larger and more active federal government. To the Left, there is an automatic and unquestioned connection between bigger government and improved lives for the poor. But the real concern of liberalism has not been the interests of the average person, it has been the growth of government. 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

Despite liberal claims, big government does not always work on behalf of the average person. And despite liberal expectations, the average person does not always reward the Left for its big government programs. The was apparent in the elections of 2010 and 2014, where voters expressed anger at those privileged interests that prospered at taxpayer expense, such as the well-connected Wall Street firm of Goldman Sachs that got bailed out, corporations like General Electric that were able to avoid taxes, and public employee unions able to secure pensions and benefits unavailable to most Americans.

The average American understands that government inherently confers benefits on selected groups. The bigger the government, the more well-connected the groups have to be to secure those benefits. And the bigger the government, the more the well-connected are favored over the well-deserving. In the 2009 stimulus package, for instance, it was the improvident who were bailed out, while the prudent were stuck with the bill.

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. The Affordable Care Act ("ACA") 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 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

For decades, the Left has been claiming that increased government involvement in the economy is needed to give the poor and the average person a chance at economic advancement. But time and again, it has been proven that government spending has relatively little economic benefit. The $831 billion 2009 stimulus package, for instance, had a negligible effect on the overall economy and the incomes of the average American. Moreover, since 2002, total federal spending has increased nearly 90 percent, while median household income has dropped five percent. The rich have prospered during the Obama era of soaring government spending, but the rest of society has languished. In fact, the share of the adult population out of the labor market recently hit a 35-year high.

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 by the poor and working class far more 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 have seen their incomes fall by roughly 7 percent. Young people under the age of 25 have experienced a decline of almost 10 percent. Black heads of households have had their income fall by almost 11 percent. The incomes of workers with a high school diploma or less have fallen 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 responded with 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.

The Federal Reserve's QE program was the largest financial-markets intervention by any government in world history. Economic experts estimate that the Fed spent more than $4 trillion, which yielded a miniscule total return of .25 percent of GDP. But 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. Banks have seen their collective stock price more than triple since 2009. And the biggest ones have become a virtual cartel, with just .2 percent of them now controlling more than 70 percent of U.S. bank assets.

The QE program shows how the federal government's increased size and power has concentrated wealth in fewer hands. On one hand, higher government spending, taxes, and regulatory activity inhibit the economy, hurting the average person. On the other, the QE program attempts to counteract those policies and spur economic activity, but in the end all that happens is that the rich get richer at the expense of savers and average people.

Government regulations can hold back advancement by the poor in various other ways. Occupational licensing, for instance, may make sense for surgeons and architects, but not for a lot of other jobs that could provide a path out of poverty. Jobs like hair dresser, teeth whitener and real estate salesperson are among the jobs most protected by state licensing cartels that lock out those individuals without the time or resources to spend on classes.

Immigration policies, though appearing to some well-intentioned on the surface, can also be damaging to the poor. As Mike Gonzalez acknowledges in A Race For the Future: How Conservatives Can Break the Liberal Monopoly on Hispanic Americans, the largest barrier to assimilation by immigrant groups is the perpetual mass immigration of low-skilled individuals. Massive immigration puts strains on communities and traps immigrant groups in isolated communities. President Coolidge once stated that "new arrivals should be limited to our capacity to absorb them into the ranks of good citizenship." It does no good to open the gates to immigration, when that immigration is only going to result in people living in poverty.

Similarly, after passage and implementation of the Americans with Disabilities Act in 1990, the law and accompanying regulations had the perverse effect of moving people with disabilities out of jobs. According to analysts Richard Burkhauser and Mary Daly, 39 percent of working-age men with disabilities had earnings in 1993. That dropped to 29 percent in 2004 and 26 percent in 2009. The decline isn't because disabilities are worse and more people are unable to work: Working-age people in 1980 and 2008 had the same degree of work limitations and a similar unemployment rate. The big difference is that the federal government, through the ADA, created incentives not to work.

Current labor union policies also disadvantage the average working person. A half century ago, labor policies focused on industrial workers. But now, labor unions are strongest in a sector in which they were once practically absent: government. Federal, state, and local governments have among the highest unionization rates of any sector of employment. And the liberal embrace of these unions is not really an embrace of the working person, but another way to ensure the continued growth of government. These unions have become strong influences in government policy, advocating for higher taxes and higher government spending, which detract from the economic growth needed by private sector workers. And as a result, as Daniel DiSalvo demonstrates in Government Against Itself: Public Union Power and Its Consequences, public sector unions have profited from generous compensation packages, while workers in the private sector have struggled with stagnant wages, disappearing benefits, and rising retirement ages.

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 and who are the intended beneficiaries of the actions.

One of the most damaging and far-reaching housing programs, and one that was directly spawned by the big government approach of the War on Poverty, involved the high-rise urban housing projects of the 1960s. Projects such as Cabrini-Green and Robert Taylor Homes in Chicago crowded young children, single-parent families, and the elderly into high-rise buildings with long-time criminals, drug dealers, and gang members. The projects became notorious for shootings, gang wars, drug trafficking, and prostitution. Finally, in the late 1990s and early 2000s, the city of Chicago abandoned this government model of urban housing for the poor, concluding that it had not only failed, but had destroyed many of the lives of those it had meant to serve.

Rent control laws are another example of government action gone awry in ways that are most harmful to the poor and vulnerable. Because rent control laws inhibit developers from building new rental housing, such laws result in housing shortages, which then force the poor into overcrowded units. Under rent control schemes, landlords also reduce their maintenance expenditures, which then leads to lower quality housing.

Real estate development restrictions likewise 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 construction 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 has made the construction of new housing all but impossible for anyone except the affluent.

The irony of Kahn's findings is that several of California's larger, liberal cities have enacted local minimum wages that are higher than the state's minimum wage, on the ground that the costs of housing are so high that low-wage workers can barely survive. But the reason housing costs are so high is because the cities have adopted development restrictions that decrease the supply of housing, which in turn increases the price of it. So a vicious circle is created. Minimum wages are adopted to combat the increasing costs of housing, caused by increased regulation, but then the increased minimum wages decrease the supply of low-income jobs, which then makes it even harder for the poor to afford housing. But the same impulse that leads to an increase in the minimum wage had previously led to housing restrictions that increased the cost of housing.

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."

Contrary to the liberal claim that led to passage of Dodd-Frank – that the financial crisis arose because of insufficient government regulation of the private sector – in reality the crisis was ignited and fueled by misguided government over-regulation, pushing the private sector to issue mortgages to low-income people who could not pay them off. As Peter Wallison points out in his book Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis – and Why it Could Happen Again, the federal government housing policies of the Clinton and Bush administrations led to the financial crisis in 2008. Therefore, Dodd-Frank, passed in 2010 and falsely proclaimed as a necessary remedy for the causes of the 2008 recession, did not even address the true causes of the crisis. All it really did was to further expand an already bloated and burdensome federal bureaucracy.

Although Dodd-Frank was meant to prevent the kind of risky financial practices that contributed to the 2008 financial crisis, it instead tends to reinforce that risky behavior. By enshrining in law the principle of "too big to fail," it essentially puts the U.S. taxpayer in the role of bailing out the biggest financial institutions, no matter how risky their behavior. This relieves the big banks from bearing the consequences of the risks they take. Because of the "too big to fail" policy, large institutions can pursue abnormally high returns with less concern for the high risks that often accompany such investments, since they know the government will ultimately assume that risk. This puts the government in partnership with the biggest of financial institutions, putting every other entity at a disadvantage. And to pay for this regulatory scheme, fees have been raised, and services curtailed, that hit the poor the hardest.

Note: Part II of this essay will appear in a subsequent post.

© Patrick Garry

RenewAmerica analyst Patrick Garry also writes a column for RenewAmerica.


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