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August 22, 2012

Big Government and Political Instability Intertwined

By

The economic crisis in Europe is highlighting a truth about big government that should start alarm bells ringing in the United States: When governments reach a certain size and influence in the economic lives of citizens, every economic crisis becomes a political crisis, too.

When government takes over responsibility for finance, production and jobs, the competitive forces of the marketplace are replaced by political jockeying for influence, favors and insider deals. Corruption becomes a way of life, and when the stakes get large — as they have in recent months in Greece, Spain and Italy — the unemployed, pensioners and others whose government benefits are threatened can spill into the streets in political demonstrations and riots.

Americans have accepted for years the idea that big government, even socialism, is the natural way of life for Europe. But in recent years, already large governments in some European countries (guess which!) have been expanding even more. In Greece, government spending as a percentage of the gross domestic product, or GDP, was 46.7 percent in 2007. It rose as high as 53 percent during the 2009 recession and settled at 49.7 percent in 2011. In Spain, spending rose from 39.2 percent of the economy in 2007 to 43.6 percent in 2011.

While a 3 or 4 percentage point increase may not seem like much, the destabilizing impact on European government finances has been substantial. Average government debt in Europe (as a percentage of GDP) rose from 39.0 percent in 2007 to 56.8 percent in 2011. Debt levels in Greece soared from 105.4 percent to 163.3 percent.

Costs associated with that increase in debt have forced cutbacks in government services and spending. Governments have fallen as a result. Last year alone, voters kicked out the old governments in Greece, Italy and Spain — an unmistakable expression of disapproval of those leaders’ economic policies. That disapproval wasn’t just confined to the polls. All three countries experienced rioting, too.

Why should the U.S. be concerned? Because our trends are just as bad as those in Europe. Our government spending as a percentage of GDP has risen from 36.7 percent in 2007 to 41.4 percent in 2011. Our debt (as a percentage of GDP) has gone up from 67.2 percent in 2007 to a truly frightening 102.9 percent in 2011. As for political action, the tea party and Occupy movements give a glimpse of what might lie ahead.

As the federal government intrudes more and more into our economic lives, our economic decisions are increasingly the subject of political debate and law, and less and less the result of the voluntary contractual interactions of the private sector. As a result, the competitive pressures of the marketplace, which reward and foster innovation and efficiency, are being overtaken by the coercive political pressure of government edicts, which reward the interests of whoever, individually or collectively, holds the levers of political power. Examples abound, from the bailouts of General Motors to the sweetheart deals of Obamacare.

In a free-market economy, economic decisions are handled in a decentralized fashion. There’s plenty of turnover in jobs and incomes, but decisions on salaries or layoffs affect only one firm, or a few at most. Chances are that decline in one sector will be balanced by growth in another. That’s not the case when decisions are centralized in capital cities and government offices. Then everybody gets affected at once, and when things go wrong, they go wrong in a big way. A CEO’s mistakes affect only one company; a central banker’s errors can destroy an entire economy.

In Europe, the economic fortunes of societies are being contested in elections and in the streets. Americans haven’t taken much to the streets yet, but as our economic decisions become ever more entwined with political action, the chances increase that a demonstration or worse will be coming to a neighborhood near you.

• Terry Miller is director of the Heritage Foundation’s Center for International Trade and Economics and its Mark A. Kolokotrones Fellow in Economic Freedom.

First appeared in The Washington Times.

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