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The Economic Curse of Good Government

Economics / Government Intervention Dec 09, 2009 - 02:14 PM GMT

By: William_Anderson


Best Financial Markets Analysis ArticleAs one who has made a career out of criticizing government and exposing the various predations of government, one would think I would be intelligent and wise enough not to expect that entity we know as "good government." In fact, given that I am quite familiar with the entire socialist calculation debate and have assigned numerous papers covering that subject to my MBA students, it should have dawned upon me by now that "good government" is an oxymoron at best and a delusional term at worst.

Yet I must admit that whenever I see government doing something that is outrageous or even wasteful or seemingly stupid, my "good government" ideals seem to kick in and I find myself thinking that the powers that be could learn how to do things correctly. At that point, it never occurs to me that maybe, just maybe, the mechanism of action we know as government cannot be operated in a "proper" way at all, because no intellectual device exists that permits us to properly determine just what is "good" or "bad" government.

Not that there is a dearth of true believers. Last year, Paul Krugman waxed eloquent about the goodness of the state (as long as it is run by "good" people), writing,

Before Mr. Obama can make government cool, however, he has to make it good. Indeed, he has to be a goo-goo.

Goo-goo, in case you're wondering, is a century-old term for "good government" types, reformers opposed to corruption and patronage. Franklin Roosevelt was a goo-goo extraordinaire. He simultaneously made government much bigger and much cleaner. Mr. Obama needs to do the same thing.

However, before one can be a true goo-goo, one must believe in the state. Witness Krugman's description of the failures of the Bush administration:

Needless to say, the Bush administration offers a spectacular example of non-goo-gooism. But the Bushies didn't have to worry about governing well and honestly. Even when they failed on the job (as they so often did), they could claim that very failure as vindication of their anti-government ideology, a demonstration that the public sector can't do anything right.

This is a curious way to describe the failures of government, blaming those malfunctions on the notion that those carrying out their powers really did not believe that their powers were legitimate, and so they failed. I recall many things that Bush and his minions did while they were in office, but I cannot recall any time that anyone in that administration was reluctant to use their powers. Indeed, the Bush administration was extremely abusive during its eight years in power, and I don't believe that the administration engaged in such behavior because its principals were laissez-faire libertarians, and I do not recall Bush blaming the failures of the government's pathetic and ill-advised response to disasters like Hurricane Katrina on the illegitimacy of government.

(Granted, I am using logic here, something that generally is missing from Krugman's column. Instead, we see partisanship and personal invective, combined with the religion of statism, something that really should be beneath a man who has received the academic honors he has garnered in his career. While Krugman has viciously attacked the Austrians in his writings, I cannot recall reading anything by an Austrian, dead or living, that makes the same kind of politically partisan comments that regularly appear in Krugman's articles and columns.)

Unfortunately, Krugman goes on to claim that FDR created a governing apparatus via the New Deal that wisely and honestly dealt with the economic calamity in a positive way:

F.D.R. managed to navigate treacherous political waters safely, greatly improving government's reputation even as he vastly expanded it. As a study recently published by the National Bureau of Economic Research puts it, "Before 1932, the administration of public relief was widely regarded as politically corrupt," and the New Deal's huge relief programs "offered an opportunity for corruption unique in the nation's history." Yet "by 1940, charges of corruption and political manipulation had diminished considerably."

The historical record says something else. James F. Couch and William Shughart in their book, The Political Economy of the New Deal, lay out example after example of the political calculus that was used in determining where New Deal relief money would be spent. They concluded, after examining the spending patterns, that political considerations determined what projects would be funded and how much money would go into them.

In reviewing the book 10 years ago, I noted how the authors pointed out the Works Progress Administration (WPA) pay differentials in different states:

One example [Couch and Shughart] give is the dispersal of Works Progress Administration (WPA) projects. Given the supposed "compassionate" nature of the Roosevelt administration, one would think that those in the most dire need would receive the most help. Under the leadership of Roosevelt deputy Harry Hopkins, however, the WPA discriminated among states according to the political needs of the Democratic party, as government dollars were distributed according to their marginal political benefit.

Compensation was tied to area incomes. For example, an "intermediate" WPA worker in Tennessee would earn 23 cents per hour, while his counterpart in New York received $1.57. Skilled laborers working on WPA projects made 31 cents an hour in Tennessee and Alabama and $2.25 in New York. Professional pay was 34 cents per hour in Alabama and $3.03 in Pennsylvania.

Compare the Couch-Shughart study to Krugman's praise of the WPA:

The Works Progress Administration, in particular, had a powerful, independent "division of progress investigation" devoted to investigating complaints of fraud. This division was so diligent that in 1940, when a Congressional subcommittee investigated the W.P.A., it couldn't find a single serious irregularity that the division had missed.

F.D.R. also made sure that Congress didn't stuff stimulus legislation with pork: there were no earmarks in the legislation that provided funding for the W.P.A. and other emergency measures.

According to the very partisan Krugman, government under FDR acted with compassion and worked to meet needs as they existed. According to Couch and Shughart, government acted, well, like government. New Deal money was used to buy votes and to spread political influence.

Krugman also fails to point out that in many cases, WPA workers were forced to register as Democrats and some projects required workers to make financial contributions to the Democratic Party. But since he is a partisan Democrat, I suspect he believes that such a requirement was part of enforcing "good government."

In other words, any accurate reading of the historical record demonstrates that the New Deal was not the epitome of "goo-gooism," or whatever Krugman wants to call it. Instead, we find that people in government operated according to the political calculus that both Austrians and public-choice economists have been pointing out for years.

What can be done? To be honest, nothing. There is no way that we can create a government that taxes and spends according to some imaginary formula that "maximizes" the "public good." These are merely terms created to hide the fact that the only calculus politicians can call upon is based upon political costs and benefits.

Obviously, pointing out that politicians make politically based choices is a no-brainer; even people like Krugman are not oblivious to political corruption. However, so-called progressives believe they have a way to create and maintain "good government": place more power in the hands of the executive branch of the US government. The executive branch, which would be dominated by "selfless" bureaucrats and "experts," would allow resources to be directed "properly" by taking the decision-making power from the hands of elected politicians who are prone to corruption and let the people with the best intentions make the important decisions.

However, if there is one thing we have learned from this country's century-old experiment in giving "independent" bureaucrats more power, it is that the bureaucracies created their own political fiefdoms and the problems and economic dislocations they have forced upon our society are worse than anything even the most corrupt politicians have done.

We are dealing with human nature, and putting on the robes of a selfless bureaucrat does not increase one's qualifications to run the affairs of others. Furthermore, the notion that experts placed in government are going to run things properly is delusional at best and dangerous at worst.

Take the Federal Reserve, for example. The Fed is a Progressive Era creation, with its vaunted "independence" from whims of politicians. Its chairman, Ben Bernanke, is a really intelligent person who has operated in the highest academic circles. He was valedictorian of his high-school class, went to Harvard, and received his doctorate from MIT. Bernanke is the epitome of Progressivism and "good government," and if there is a "goo-goo" in Washington, it is Bernanke.

However, this really intelligent person almost has single-handedly run the US economy into the ground. Granted, it takes a very special person to have this kind of influence, but Bernanke has been up to the task. Now, it would seem to me that Bernanke is exactly the kind of expert we would want working in the temples of government. I don't detect his taking money on the sly or engaging in the bottom-dwelling quid pro quo actions of many people in government.

In other words, I believe that Bernanke truly believes that he has been doing the right thing. However, the man has been a disaster. He has had the power to act on his belief that the Great Depression came about because Herbert Hoover's government did not print enough money. The notion that inflation is a positive economic force should be verboten to anyone with a doctorate in economics, but here we see Bernanke as the apostle of inflation, being cheered by other "good government" elites who are either stupid or craven enough to demand the destruction of the US dollar.

The response of the elites has been predictable. The Atlantic magazine, in a recent issue praising Bernanke and other "Brave Thinkers," sniffed that Bernanke "somehow found time to bear the made-for-TV harangues of financially illiterate members of Congress." Bernanke's quote for the article tells the story of the "expert" who is just plain wrong.

There were many people who said, "Let them fail. It's not a problem. The markets will take care of it." And I think I knew better than that.

However, it is utterly clear that Bernanke did not know better than the markets. And what were the brilliant things that he did in order to confound those ignorant markets that wanted to liquidate the failing firms? According to the Atlantic,

He dropped target interest rates to near-zero for the first time in history; made trillions of dollars in government cash available to financial institutions; expanded the Fed's lending and relaxed its collateral requirements; bought up billions of dollars in securities backed by consumer debt and mortgages; prevented the collapse of AIG, Fannie Mae, and Freddie Mac…

This is not brilliance; this is cranking up the printing presses, something that governments have done in Argentina, Zimbabwe, and Bolivia, not to mention Weimar Germany, with predictable results. The problem was that none of the things that Bernanke did addressed any of the real damage done to the structure of production in our economy. He just showered the markets with paper money, and his adoring chorus in the media and academe sang his praises.

I suspect that Bernanke has set an example of "good government" for these elites. First, he "saved" the economy; second, he has had to put up with "non-goo-goos" like Ron Paul, who clearly do not worship the state nor the characters that statism produces.

Those of us who understand that the mechanism of economic calculation is not something that "goo-gooism" can successfully reproduce via simple brilliance certainly won't be declared heroes by the apostles of statism. Indeed, we are placed in the category of the "financially illiterate" because we understand that sound money is not a hindrance to economic growth or even to economic fairness.

Unfortunately, the "good government" advocates don't see it that way. Instead, "good government" seems to involve reckless spending by Washington, endless printing at the Fed, and bailout after bailout. After all, the "goo-goos" know best.

William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Send him mail. See William L. Anderson's article archives. Comment on the blog.

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