- The Washington Times - Tuesday, December 27, 2011

ANALYSIS/OPINION:

The economy’s near stagnation underscores government’s limited ability to affect it positively. However, this is not to say government cannot have a pronounced negative impact. As governments globally are showing, they can set up unrealistic expectations that are economically unsustainable over the long term.

November’s unemployment-rate decline to 8.6 percent still held sobering news. Unemployment first reached 8.6 percent in March 2009 and has not been below that since.

And much of November’s decline to that level was caused by a drop in the labor-force participation rate: Many people simply have stopped looking for work.

Measured by the human yardstick of unemployment, the economy remains relatively stuck. This despite unprecedented monetary (almost zero percent interest rates and massive securities purchases by the Fed) and fiscal stimulus (creating the highest peacetime deficits in America’s history and trillions in new debt).

An economy in neutral in spite of Washington intervention in overdrive underscores government’s limited ability to affect it positively.

This does not mean government has no role when it comes to the economy. The economy needs the government to provide security of person and property and the enforceability of contracts.

The economy also needs government stability. That means predictability: that the rules of the game will not change rapidly or randomly and that any change will follow a known process.

Government providing a stable money supply also is vital. That means matching it to the economy’s growth to protect against inflation or deflation.

Finally, transparency is also important. That means reasonable regulation can aid the economy. Knowledge has value, so regulation’s dispersion of knowledge about products and services helps reduce risk.

However, once government has accomplished these basic tasks, its activity has a rapidly diminishing economic return. And the risk of negative action correspondingly rises. It is for this reason that conservatives are rightfully suspicious of increasing government intrusion.

The argument has been made that the economy would be even worse off without government’s recent massive action. However, we must at least acknowledge the possibility of the reverse: that the economy might have benefitted more from less government action - an argument that gains popular force as the economy remains stalled.

We also must recognize that government action has not solved the economy’s problem.

It is humbling for politicians to admit they have limited answers for the economy. That’s the reason they rarely do so. Who would want to lay claim to that? So rhetorically, they reverse reality and claim the opposite: that they can positively affect the economy.

Such political claims are far from benign bendings of the truth. They have real negative consequences. In this case, talk isn’t cheap.

Politicians’ claims raise the public’s expectation that the government really does have profound positive economic powers. By so doing, those claims also increase the public’s demands for the very government services that prove unsustainable over the long term. Finally and insidiously, the claims also make the public unwilling to accept the real medicine it needs to swallow to return the economy to long-term health.

Ironically, anti-capitalist societies have almost disappeared. Even nominally communist countries have adopted capitalism in practice, using its benefits to sustain their regimes politically. As a result, capitalism has its broadest reach and promises only to spread further with Asia’s expanding embrace.

Conversely, nominally capitalist countries, whose governments expansively adopted state-run social services, are foundering under unsustainable debt, as Europe demonstrates with its recent recurring crises and rapid rescues worthy of “The Perils of Pauline.”

Economic truth is the opposite of political assertion. Politicians claim they have a great hand in economic prosperity but little responsibility for the economy’s downturns, which are always attributed to factors beyond their control. The economic truth is that politicians have limited ability to affect the economy positively once they have taken basic steps. Sadly, we are seeing globally that they have great ability to harm it.

Like the emperor who wore no clothes, governments continue to parade before the public resplendently revealed in their economic undress. Just as the emperor’s vanity was his undoing, so is that of today’s politicians who cannot bear to admit that they do not have the economic answers.

J.T. Young has served in the Treasury Department, the Office of Management and Budget and as a congressional staff member.

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