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Home > Blogs > Anthony Harrington > What stops improving living standards for everyone? Answer, interventionist politicians…

What stops improving living standards for everyone? Answer, interventionist politicians…

Fiscal stimulus | What stops improving living standards for everyone? Answer: interventionist politicians Anthony Harrington

There can be few people who do not grasp that the UK is facing a huge deficit as a result of the stimulus measures undertaken to help the economy recover from the global crash of 2008. Nor is the UK alone. The US, like the UK, is facing the biggest budget deficit in history. And on a like for like scale, so are Ireland and Greece, with Portugal, Spain, Belgium and Italy not far behind. All this as we start the second decade of the 21st century. Whatever happened to the idea that living standards are supposed to go up, not down, in the developed world?

Back in 2003, in an era where the US was recovering strongly from the dot.com tech bubble crash, the economist George Reisman wrote a piece called “What is Interventionism?”. Reisman defined interventionism as a government style, stopping short of outright socialism where the means of production are completely under government control, which uses force continuously to compel individual economic actors to make decisions that they would not otherwise make.

According to Reisman, the only legitimate use of government force is that applied to protect individual rights. That is the proper job of government. What is not the proper job of government is to act to forbid the following:

“… any voluntary, contractual relationship, such as the offer and acceptance of a price or wage, or products or working conditions, that the parties judge to be in their respective self-interest to offer and accept. Likewise, the government initiates the use of physical force whenever it compels one man to pay any part of  his wealth or income, against his will, for the benefit or support of another, as is the case in the financing of public welfare, public housing, and public education, or for some alleged benefit to himself that he prefers not to pay for, such as a future Social Security or Medicare benefit.”

Reisman then does a few sums, as one might expect from an economist. He analyses the Federal Budget for the year in which he is writing (2003), which amounts to $2140 billion. To this he adds the state and local government budgets and comes out with a net figure of $3237 billion. Against this, he applies an adjusted total net income budget for all working Americans, which comes to $6693 billion, and demonstrates that total spending by authorities works out at 48% of individual incomes.

However, as he says, this is only the tip of the iceberg. All those agencies created and run by government, such as the Environment Agency and the Anti Trust division and so on, impose huge additional costs which people would not voluntarily undertake. When you add all this together, to summarise his argument, it is no wonder that despite massive improvements in productivity, which continually drive down the cost of consumer goods, real wages in the US have been flat or falling for the last 30 years, and much the same story could be told across the developed world.

"By preventing individuals from doing what it is in their interests to do and compelling them to do what it is against their interests to do, it is not surprising that interventionism succeeds in holding back improvements and driving up costs."

For Reisman, the current 15 Cabinet Departments of the US government would, if subjected to the “non-intervention” test, reduce to just four: Justice, Defence, State and Treasury, all of which would be slimmed down to reflect dramatically reduced roles. The resulting savings, Reisman says, would amount to between 80% and 90% of current Federal spending. As he puts it: “The elimination of this spending would make possible the abolition of the personal and corporate income taxes and the inheritance and capital gains taxes …”

His point, which he is not afraid of hammering, is that interventionism is hugely costly. We’re not getting a better standard of living, we’re getting more and more intervention instead. He cites the Austrian School economist Ludwig von Mises: “Prior intervention breeds later intervention.” Reisman gives the following examples:

“…the government imposes rent controls. The result is that private investors don’t want to build rental housing, because it isn’t profitable. Instead of repealing the rent controls, the government goes on to build public housing, claiming that the free market has failed…

Or it imposes rate regulation on the railroads and at the same time inflates the money supply, compels the railroads to deal with the railway unions, and subsidizes massive highway construction. The result: lack of profitability in railroading and declining investment and quality and service in that industry, all adding up to another alleged failure of the free market and consequent alleged need to nationalize an industry.”

There are, of course, plenty of difficult arguments which proponents of non-intervention such as Reisman need to deal with, such as the positive effect of actions to break up price-fixing cartels. The liberal tradition has always recognised that there have to be some constraints on individual liberty or freedom itself goes out the window. But his essay is a salutary exercise in today’s highly interventionist climate. There has, for example, probably never been such an appetite for regulation, and this despite the complete absence of proof that regulation has the power to prevent economic crashes. We hope it will, but it hasn’t done so to date, and probably won’t tomorrow, despite Basel III and the Dodd-Frank Act, and whatever else lies down the interventionist road.

Further reading on fiscal stimulus and its impacts:



Tags: fiscal stimulus , George Reisman , interventionism , Krugman , Ludwig von Mises , quantitative easing
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