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MITCHELL: Knowing when to relinquish the reins
Government works best when it lets citizens lead
Inconceivable as it might have seemed in the fall of 2008, another major political shift is happening today. Polls show that a mere two years after the Democrats' impressive sweep, Republicans are poised to seize the House and perhaps even the Senate. Are American voters schizophrenic? In one election they deliver full control to one party, but in the next, they repudiate that decision.
Voters are not schizophrenic, but instead, misunderstood. Time and again, they turn against incumbents who assume too much control. As a result, new politicians have entered office believing voters have handed them a powerful mandate to take control. Democrats made this mistake after the 2008 election, but Republicans made the same mistake in 2000 and 2004.
Following each of these elections, leaders in Washington attempted to take control of more and more - banks, mortgages, auto companies, local infrastructure, health care, finance, foreign nation-building and more. The more it seems officials tried to control, however, the more ineffective they proved at solving problems. Despite the best of intentions, greater government control did not smooth out the edges of the business cycle or lead to more prudent decision-making. Instead, it led to a false boom, a real bust, bailouts and now stagnation.
Once again, voters are poised to turn against incumbents. If they are smart, voters will look to candidates who will relinquish control rather than amass it in Washington.
When government policies push, prod and nudge people in different directions, it takes power away from private individuals. One might say the consumer and the entrepreneur are “crowded out” - a term economists use when government activity displaces private activity.
Crowding out was first observed and applied to government deficit spending. In the long run and sometimes even in the short run, crowding out can undo the effects of a fiscal stimulus. For example, when government borrowing drives up interest rates, that makes it harder for businesses to finance their own spending, or when forward-looking consumers anticipate an increase in taxes, they increase their savings and spend less in the economy today.
Harvard economists Joshua Coval, Lauren Cohen and Christopher Malloy recently examined the extent of crowding out associated with earmark spending. They found that after a district’s representative or senator ascended to a powerful committee and began to steer more pork home, the firms in his district saw a loss in sales, cut back on their spending and reduced their work force.
Just as government spending can displace private spending, so government employment can displace private employment. Looking at a sample of Organization for Economic Co-operation and Development countries over 40 years, economists Yann Algan, Pierre Cahuc and Andre Zylberberg have found that, on average, the creation of 100 public-sector jobs displaces 150 private-sector jobs.
Crowding out isn’t just about jobs and spending, though. It also has been observed in the cases of charitable giving and health insurance: When governments provide more charity and more insurance, private individuals tend to provide less. As Elinor Ostrom, last year’s Nobel laureate in economics, notes, government activity can even crowd out problem-solving. In 2005, she wrote, “Reliance primarily on national governments crowds out public and private problem solving at regional and local levels.”
In the past decade, government has steadily - and at times, rapidly - assumed more control over more aspects of the American economy. To get out of this mess, we must abandon the notion that government needs to take control of things to make them better. Simply trying to move around aspects of the economy like chess pieces doesn’t work.
Officials may wish to encourage people to do the “right” thing. (Policies have encouraged people to take out mortgages, get married, have children, caulk their windows and trade in their old cars.) But it is precisely this temptation to manage every aspect of our lives that has crowded out the consumer, the entrepreneur and the local problem-solver.
Whichever party emerges victorious Tuesday, let’s hope it does not interpret its victories as a mandate to take control, but as one to relinquish it. When it does, it will find that newly empowered consumers and entrepreneurs are well-equipped to solve many of our most pressing problems. They have the local knowledge, the on-the-ground expertise and - importantly - the ability to experiment.
Matt Mitchell is a research fellow with the Mercatus Center’s State and Local Policy Project at George Mason University.
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