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Home Publications Blogs Beat the Press Washington Post and Kaiser Conceal Role of Government In Economy

Washington Post and Kaiser Conceal Role of Government In Economy

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Sunday, 19 August 2012 07:22

The Washington Post devoted a major front page article to the results of a poll that it sponsored along with the Kaiser Foundation on attitudes of the public to the role of government in the economy. The poll purported to find large divides between most Democrats and Republicans on the proper role of government in the economy and whether people preferred bigger or smaller government.

The piece (presumably following the poll) fundamentally misrepresents the role that the government plays in the economy. It implies that "big government" means a government that taxes and/or spends a great deal, ignoring all the ways in which government interventions determine flows of money that do not involve direct taxation or spending.

To take an obvious example, government granted patent monopolies raise the price of prescription drugs by close to $270 billion a year compared to the free market price. In terms of its impact on the economy and people's lives this has roughly the same effect as if the government were to raise taxes by $270 billion a year (more than $3 trillion over a decade -- keeping pace with the growth of the economy) and use the money to pay drug companies to develop drugs. 

Similarly, the high dollar policy that the United States has pursued since the Clinton years has the effect of destroying jobs and lowering wages in sectors of the economy (most importantly manufacturing) that are exposed to international competition. The high dollar policy is a major factor redistributing income from the bulk of the workforce to those who have the political power to largely protect themselves from international competition (e.g. doctors and lawyers).

The government also transfers tens of billions of dollars a year to the financial sector through the "too big to fail" insurance that it provides at no cost to the major Wall Street banks. This governmental support provides the basis for many Wall Street fortunes.

The WAPO piece fundamentally misrepresents the importance of government in the economy by reducing it tax and spending policy. The impacts of these policies are trivial compared with the impact that government policies have in structuring markets. It is simply wrong to imply that a government is "small" by virtue of the fact that it does not tax or spend much compared to the size of the economy.

Comments (13)Add Comment
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written by Gerry Flaychy, August 19, 2012 8:37
Your article give the impression that the most important interventions of the government in the economy are bad interventions: is it really what you are saying ?
The End of Tax and Spend Liberals, Replaced by Rent and Extract Conservatives
written by Last Mover, August 19, 2012 9:58
The WAPO piece fundamentally misrepresents the importance of government in the economy by reducing it [to] tax and spending policy. The impact of these policies are trivial compared with the impact that government policies have in structuring markets.
Government's Invisible Thumb on the Scale
written by Ron Alley, August 19, 2012 10:01
Government's actions, as well as its failures to act, all amount to an invisible thumb on the scale that alters the amount some pay and others receive.

The Supreme Court decided Citizens United. Congress and the President took no action. Can you imagine how different the 2012 campaign would be if Congress had enacted legislation creating the shareholders' right to sue the corporation, its officers and directors for contributions to candidates, parties and their proxies? What if the shareholder's suit was structured so that the plaintiff shareholder only had to prove that such a contribution was made and the burden of proof was placed on the corporation to prove that the corporation received demonstrable economic benefit from the expenditure of corporate money.
...
written by Downpuppy, August 19, 2012 10:18
Knowing that Dean will run into Ohlemacher's Part 3 on Social Security, I have some thoughts at http://downpuppy.blogspot.com/...orner.html
Good or bad?
written by David, August 19, 2012 10:18
The question is not whether they are good or bad (moralistic terminology), but whether these policies are sustainable or not to maintain a democratic politie. There are alternative structurings of the markets that do not lead to gross inequalities. The US is closer in politics and economics to Mexico than to Canada. That's not the outcome we want.
Aphorism
written by David, August 19, 2012 10:26
Good structuring of markets is necessary. Bad structuring of markets is inevitable.
...
written by skeptonomist, August 19, 2012 10:40
If the US has been following a strong-dollar policy since 2002 it has not been very effective because the value of the dollar has been dropping since then:

http://research.stlouisfed.org/fred2/series/TWEXB

Despite what Dean claims in every post on this subject, this drop did not reverse the increase in the trade deficit over this time; the trade deficit increased about as much when the dollar was dropping 2002-2008 as it did in the preceding period when the dollar was rising.

The real world does not always work the way economists are taught. It would be very helpful if they occasionally tested what they learned from textbooks when they were young against real-world data. Government policies have important effects on things like international trade but not everything can be controlled or fixed with monetary manipulations.
...
written by liberal, August 19, 2012 12:44
The government also transfers tens of billions of dollars a year to the financial sector through the "too big to fail" insurance that it provides at no cost to the major Wall Street banks.

Bad, yes, but peanuts compared to handing 10-20% of GDP to landowners for doing nothing.
...
written by JSeydl, August 19, 2012 1:27
Despite what Dean claims in every post on this subject, this drop did not reverse the increase in the trade deficit over this time; the trade deficit increased about as much when the dollar was dropping 2002-2008 as it did in the preceding period when the dollar was rising.


You are looking at the broad trade-weighted dollar index. The trade deficit is driven in large part by the value of the dollar with respect to the currencies in Asia. Here's a chart of the JPM Asia Dollar Index, which measures the value of the dollar against 10 different Asian currencies (up means weaker dollar, down means stronger dollar): http://www.jseydl.com/wp-conte...50Year.png

In the period that you're talking about (2002 to 2008), the dollar was heavily overvalued against the currencies in Asia.
the value of the dollar versus the value of the dollar
written by David, August 19, 2012 3:54

...
written by skeptonomist, August 19, 2012 10:40

... It would be very helpful if they occasionally tested what they learned from textbooks when they were young against real-world data.


"Physician, heal thyself." The above data is for 1995-2008, found on the FRB Atlanta site. It clearly shows the Pacific region distortions in the index. We did really well against Europe though, but it only accounts for fairly little of our trade (Add up the total trade with Germany, UK, France, and Netherlands and it's still only ~60% of our trade with China). Canada and Mexico are much more significant trade partners than the Europeans, but again the dollar is high relative to their currencies. So, your (skeptonomist's) "gotcha" is not a "gotcha." It's yet another example of people not understanding aggregate measures and submanifold intersections.
graphic for above
written by David, August 19, 2012 4:38
Here is the chart of the dollar index versus regional currencies, from the FRB Atlanta site.
@liberal
written by David, August 19, 2012 4:49
Can you give links to the landownership subsidy calculation(s)?

Farms and resource managers receiving subsidies is not great management. But it's still remarkable that banking, which produces no real resources of its own (paper instruments and contracts, I suppose), gets subsidies of the size they do.
...
written by liberal, August 19, 2012 8:48
David wrote,
Can you give links to the landownership subsidy calculation(s)?


I could, but do I really need to?

Farms and resource managers receiving subsidies is not great management.


Huh? Most land rent in the US doesn't accrue to agriculture; it accrues to commercial and residential real estate.

For most people, shelter is the biggest expense they have; and unless you live in a rural area, a large fraction of that is land rent. Certainly where I live, it's more than 2/3 of my housing costs.

For businesses, making rent has to be one of their greatest expenses. For some, it has to be their largest expense.

As for stats, that's kind of hard to say, because the economists who do these computations don't understand how to compute land rent. One computation put the total value of the land portion of commercial real estate in the US at a few billion dollars, which is laughable and shows how stupid and corrupted these people are.

A good google search would be something like gdp land rent mason gaffney.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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