All politicians favor economic growth. They all promise to create jobs and “grow the economy.” That is a vintage Republican issue, but the Democrats aren’t dummies. Many of them have learned that the old appeal to class warfare and other quasi-Marxist themes are passé. They too have thrown themselves onto the growth bandwagon. Bill Clinton’s so-called New Democrats can take credit for grafting the rhetoric of growth to the policies of big government. Hence, Clinton can both declare that “the era of big government is over” and propose an increase in the minimum wage and myriad other interventions in the economy.
This may come as a shock to Republicans and Democrats alike, but growth should be of no concern to the government. The idea that the state is the steward of the economy is an intrinsically statist idea. In no way can it be squared with free markets. Growth rhetoric, regardless of the intentions of those who use it, will ultimately serve the interests of statists. It is poison, and however sweet its aroma, advocates of freedom must keep from it.
State stewardship of the economy is an old idea. But the theory came into prominence after World War II, thanks to John Maynard Keynes. It was he who wrote during the Great Depression that the market economy can get stuck in a rut, with high unemployment and low investment. Keynes said that, like a car in the mud, the economy may not be able to recover under its own power and would therefore need a push by the state’s central bankers and fiscal officers.
To the uninformed, the persistence of the Depression seemed to support Keynes. People thought America had a free market before the Depression. They also thought Herbert Hoover had pursued a policy of laissez-faire. Thus, many people were open to Keynes’s views. In truth, those beliefs were wrong.
The reality of the 1930s did not confirm Keynes’s observations; rather it vindicated Ludwig von Mises and F.A. Hayek, the Austrian-school economists who showed how governments create and perpetuate recessions and depressions through their monetary policies.
Nevertheless, the Keynesian view triumphed. There were some key reasons for that. Politicians obviously preferred Keynes’s to Mises’s worldview because it was conducive to the exercise of political power. (The Austrian approach doesn’t leave much for politicians to do except keep the peace.)
Moreover, World War II, like World War I, gave American policymakers a chance to exercise that power. In the name of the war effort, the federal government effectively nationalized the U.S. economy. (The prewar New Deal had already gone far in that direction.) The planners worried that when the war was over, Americans might demand a retrenchment of government. Because of the economic fallacies they held, they also believed that America would slip back into depression unless government stayed at the helm. Those things could not be permitted to happen. Keynesianism provided an ideology to justify continued intervention. As Robert Higgs wrote in his great book, Crisis and Leviathan , after each of America’s wars, the size and scope of government remained larger than their prewar levels. That “ratchet” effect accounts for much of the government’s growth throughout our history. (Higgs has also shown, contrary to legend, that the war did not lift the U.S. economy out of the Depression. War cannot accomplish anything so constructive.)
The upshot is that after the war, many Americans believed that the federal government had to play a large role in managing the economy. They bought the economists’ wrongheaded idea that the economy is a huge machine requiring a central operator, rather than a process comprising billions of daily decisions and transactions by individuals pursuing their own objectives. Without the government’s pulling the levers, so they thought, unemployment and stagnation would be the rule. So the postwar Congress gave the president various tools to carry out that role. For example, the Council of Economic Advisers was created.
The 1950s was a time of economic growth because people had saved during the war (there was little to buy) and afterwards that savings were available for investment. But the new prosperity coincided with the economists’ and politicians’ talk about government stewardship. Many thus concluded that the prosperity had resulted from the government’s policies. The politicians were all too ready to take credit. The commitment to activist government accelerated in the 1960s.
The real effect of the policies caught up with the economy in the late 1970s, when the term “stagflation” was coined to describe what was impossible in Keynes’s scheme: inflation and high unemployment. In response to stagflation, the growth school, in particular supply-side economics, was born. That school preached that the government needed a new strategy to guarantee prosperity. The school’s policies called for some reduction in government power: the supply-siders are best known for wanting to cut marginal tax rates. They also talked about reducing regulation.
Those policies were fine, as far as they went. But there were two problems. First, they didn’t go far enough. Many supply-siders, using Arthur Laffer’s famous curve, talked as though their main objective was to maximize government revenues. They left the impression that high marginal rates are bad not only because they are a drag on growth but also because they reduce the tax take. The presumed optimal point along the Laffer curve is where the government’s revenue is highest. The question the supply-siders never satisfactorily answered is why would we want to maximize tax revenues. As the late Murray Rothbard repeatedly pointed out, every dollar taken out of private hands is one less dollar available for satisfying consumers. (Contrast that with Clinton economic adviser Laura Tyson, who says that every dollar in tax reduction is a dollar taken out of the economy!)
But there is a more fundamental problem with the growth school: despite its devotion to cutting tax rates, its language is still the language of government stewardship. The government is supposed to choose policies according to what will “grow the economy.” While that orientation might lead to good polices sometimes, it still reinforces the idea that the government is responsible for economic growth. In Ronald Reagan’s, George Bush’s, and Bill Clinton’s hands, it has meant, for example, muscling the Japanese government into forcing private firms to buy more American-made automobiles and computer chips; that is, it has led to managed trade. It has also encouraged Republicans and Democrats to sponsor government job-training programs.
In the 1980s, the Heritage Foundation, in an attempt to counter Ralph Nader’s antibusiness crusades, tried to launch an annual event called “Growth Day.” Fortunately, it didn’t catch on. Back then, Richard Wilcke, president of a pro-laissez-faire organization called the Council for a Competitive Economy (for which I worked), had the right reaction to “Growth Day.” He opposed it and suggested “Freedom Day” instead.
And that’s the point. Wilcke was keeping his eye on the ball. Too many conservatives fail to do that. Follow them, and we will surely fail. If the focus of politics is on freedom rather than on economic growth, we will get economic growth. But if the focus is economic growth rather than freedom, we won’t get freedom. Freedom will beget economic growth because most people want a rising standard of living for themselves and their children. It is possible that a preponderance of free people will choose austerity over prosperity (some do now), and that is their right. But that is not likely. We have enough experience to foresee that most people will pursue prosperity.
The politics of growth and the politics of freedom are different. What’s more, the language of growth and the language of freedom are different. If we hope to change the terms of debate in this country, we must actually change the terms . The language of growth will always imply government activism. The language of freedom will always imply government retrenchment. We should never assent to terms that intimate that government can create jobs or produce prosperity. We should always refer to government as an impediment to those activities. No one put it better than Henry David Thoreau in his essay “Civil Disobedience.” “This government never furthered any enterprise,” Thoreau wrote, “but by the alacrity with which it got out of the way.”
What better slogan for the advocate of liberty?