- - Sunday, June 14, 2015

ANALYSIS/OPINION:

America has reversed direction from its origin of limited government and unlimited economy. Today, America is increasingly defined by an expanding government and a retreating economy. The question now is: When we will recognize this reversal?

America’s original perspective on government and the economy came from our Colonial past. Confronted with what they perceived as unlimited government — in the form of Colonial executive power and their exclusion from legislative power in the British Parliament — the Founders created a very limited government in the Constitution.

James Madison in Federalist No. 45 summed up the approach to government: “The powers delegated by the proposed Constitution to the federal government are few and defined.” The federal government was to be held in check internally by its three branches and externally by the Constitution on one side, and the state governments on the other.

Contrasting with this very narrow view of federal power was an expansive vision of economic power. Again, it originated in America’s Colonial past. As a colony, America’s economy could be thoroughly controlled by the British government. It was intended to be a producer of raw materials and a market for British manufacturing. Ultimately, the increasing regulation of the Colonial economy — as much as the British government’s increasing encroachment — separated Colonial America from its British parent.

The Constitution is as notable for its lack of economic control over the young country as its intended restraint of the new federal government.

Taxes were minimal, with the government financed almost completely by tariffs and land sales. When the government tried to intervene economically, it failed spectacularly. The C&O Canal, championed by the early government, was replaced by the railroad even before its completion. And the federal capital, Washington, D.C., was a sleepy backwater town compared to the many new cities that arose from the nation’s burgeoning economic growth.

America’s model of limited government and unlimited economy prevailed until the 20th century. It was occasionally interrupted — even seriously by World War I — but would resume. However, with the Depression and World War II in quick succession, the altered relationship between government and economy did not fully revert. Both America’s government and its economy had begun the migration from their opposite poles.

The federal budget demonstrates how far government has traveled from its original limited form. In 1930, with the country just entering what would become the Great Depression, the federal government spent just 3.4 percent of gross domestic product (GDP). In 2014, the last full fiscal year, the federal government spent 20.3 percent of GDP. Federal outlays are simply the most quantifiable area of the government’s reach, but that reach has also greatly expanded in the areas of taxation and regulation.

Arthur Laffer provided a glimpse of increasing government’s effect four decades ago. Looking just at taxation, he described the diminishing returns from increasing rates of taxation in the now famous Laffer Curve.

Simply looking at the old Soviet system, we intuitively understand Laffer’s Curve. In that case, under a system of state ownership of the means of production, the effective tax rate was 100 percent. The resulting economic sclerosis would lead to the USSR’s collapse within just three generations.

Why would not the Laffer Curve also pertain on a government-wide scale that includes regulation, spending and borrowing, as well as taxes? Why, as government becomes less limited and these areas of its economic impact increase, would there not come a point of negative effect?

As unquestionably limited as the federal government was at its origin, it is equally undeniable that its limits have been eroding. At the same time, it is equally clear that what was once a robust economy has been anything but — not just since the Great Recession, but before it as well.

If we cannot agree as a nation that an growing government has had a role in our shrinking economy, then current circumstances should at least prompt this discussion. How far and for how long must government expand before it has a negative economic impact?

For those who deny the principle behind the question, it is wise to remember that in no other area of the economy does the law of diminishing returns not prevail. Are we to believe that government’s impact on the economy is the sole exception? If it is not an exception, at what point does this diminution occur? And finally, has America already begun to feel its effect in practice?

Where once there was a limited government and unlimited economy, today there is a comparatively unlimited government and a limited economy. Following this progression, at what point do we begin to seriously measure, regulate and mitigate the impact of government’s increasingly destructive impact upon the economy?

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000.


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