Big Government Adds Friction to America’s Economic Engine

July 18, 2008 in Uncategorized

Professor Yasheng Huang of the Sloan School of Management at MIT wrote an article in the July/August issue of Foreign Policy magazine entitled THE NEXT ASIAN MIRACLE.  His central premise addresses the idea that authoritarian forms of government suppress economic development.  He compares and contrasts China’s rapid expansion with India’s significantly slower growth.  While many people might expect that a democratic form of government would foster greater economic expansion, the examples of India and China will make us think otherwise.  Indeed, we might come to the conclusion that China’s rapid growth is due to its more authoritarian style of government, and India’s slower growth is the result of greater political freedoms in that country.  However, Professor Huang concludes that China’s real expansion occurred in the 80s when the government significantly reduced intrusions on the lives of its citizens and, on the other side of the coin, India’s slow growth was due to Indira Gandhi’s unaccountable and corrupt government.

This line of thinking made me wonder what effect eight years of the Bush administration has had on the American economy and how if a Barack Obama or John McCain presidency might either reverse or perpetuate our current economic course. Although certainly not a hard and fast rule, historically the American business cycle has trended towards a pattern of eight years of growth followed by three years of hardship.  Our last real recession, which occurred in 1991 (remember, “It’s the economy, stupid.”?), was followed by eight years of historic growth.  So in the year 2000 I would’ve expected that whichever candidate won the battle for the US presidency in Florida would have been presided over three years of economic downturn.  Of course, as with any generalization, unexpected variables will always throw a monkey wrench into the system.  The events of September 11, 2001, were just such a monkey wrench.  The downturn, which I expected during the first Bush administration, never came and the significant upturn, which I would’ve expected during a second Bush administration, also never came.  However, the events of 9/11 did allow the Bush and Cheney administration to begin the largest accumulation of executive power since the Great Depression.

I should note that all though I am no Bill Clinton fan, I have always been willing to give him credit for meddling little with the US economy during his eight years in office.  As most people can tell you, new leadership usually brings change–whether it is needed or not.  New leaders want to be seen as having put their imprint on the systems they oversee.  They want to validate the ideas that facilitated their rise to power in the first place.  So it’s very common for new Presidents, CEOs, and even mid-level managers to make change for the sake of change even when no change is warranted.  Thus it is with mild dismay that I give President Clinton his due for essentially leaving the US economy alone during his eight years in office. He was smart enough to see that the economic engine of the United States was purring along nicely after 12 years of Republican governance.  In hindsight, and in light of Professor Huang’s article, I wonder now if his liberal approach to managing the economy (and by liberal I mean being released from government intrusion) might have actually been high-octane fuel for an economic engine already running at high RPMs.  And I wonder if the accumulation of executive power by the Bush administration during the last eight years has been a swift application of the breaks to America’s motor.

What is important to note from Professor Huang’s article is that it is not the actual form of government that is critical to economic acceleration.  Had that been the case, China’s authoritarian rule would never have allowed for the rapid economic expansion from which China continues to reap the benefits today.  Moreover, India would have seen a significantly more rapid growth in its economy given its well-formed democratic government.  No, the key seems to be the perception of the people regarding the direction in which government is moving.  Citizens in India, blessed with a democratic constitution, endured Indira Gandhi’s administration’s accumulation of power, restrictions on freedoms, and suppression of  states rights.  This trend seems to have made investors, entrepreneurs and creative people skittish about the security of their money.  Likewise in China, the big bang for their economic growth was Deng Xiaoping’s very liberal reforms in the early 80s.

Quoting Professor Huang, “China did not take off because it was authoritarian.  Rather, it took off because the liberal political reforms of the 1980s made the country less authoritarian.  Like India, when China reversed its political reforms and saw governance worsen in the 1990s, citizens well-being declined.”  Professor Huang concludes that while the actual number of individuals affected by specific Chinese policies was small, that, “symbolism mattered.”  Professor Huang says, “The change in direction of China’s politics was sufficiently credible to encourage millions of entrepreneurs to go into business for themselves.”

Authentic conservatives, who have been arguing for smaller federal government, will not be surprised by these conclusions.  Big government restrictions on citizens and businesses are viewed as a threat to the intellectual capital behind economic growth—creativity, risk-tolerance, investment, venture funding, etc.

This makes me wonder which of the two presidential candidates, Democrat Barack Obama or Republican John McCain, would be most likely to change the perception of how our executive branch of government is functioning.  The easy answer would be Barack Obama.  He has been campaigning for the better part of a year on a platform of change.  And no doubt a Barack Obama presidency would usher in a great deal of change.  However, would this change result in less government intrusion or more?  Given his standing as the most liberal senator in Washington and some of his policy ideas like increasing federal regulation on the banking industry and implementation of a single payer health care system, I can only imagine that his presidency would include vastly more government restraints than we see today.

John McCain has certainly been bucking the system and his party for the better part of his political career.  As a Republican, at least in theoretical ideology, we would expect him to relax federal regulation, reduce taxes, and free the components of the economic engine to operate with less friction.  But as much as he likes to place himself outside of the establishment, he is still a senator who has served his political career in Washington during a time when both parties have gotten into the habit of providing more and more from the public coffers to special interests and niche political groups.  Additionally, McCain — Feingold cannot leave us with much optimism about his desire to let Americans operate unencumbered.

If perceived reality is indeed more important than reality itself, then perhaps we should simply believe that the marketing campaigns of each candidate have already provided us with the answer to this question. In a recent poll in which likely voters were asked to say the first word that comes to  mind when prompted with each candidate’s name, the runaway front runner for Obama was “change” and the leader for McCain was “old.”  Even not being an Obama supporter, I, too, would have thought, “change” first, even as I resisted saying it out loud. Whether or not this perception of change will be sufficient to overcome the likely reality of growth in federal government and intrusion is obviously cause for speculation.  But at least he would enter the office cloaked in the perception of being a change agent. Given the direction of this discussion, I find scant cause for optimism when considering a McCain presidency.  The last year of campaigning has done little to separate him from President Bush.  Of course, upon taking office, he could change whatever perception he arrives in the Oval Office with by spending his first 100 days freeing Americans from many of the regulations and government intrusions we are currently saddled with.

As is always the case, the success of our great nation depends on the behavior of its individual citizens. We can choose to respond any way we wish.  Regardless of whom we elect as President, we can look for the areas in which we are regaining liberties, not losing them. One thing Senator Obama has right: we must BE the change we wish to become.  He, or Senator McCain will have less to do with our national success than each of us will. At least that’s my perception.