Fixing the economy is easier than breaking the corporate grip on government

Divide and rule. It’s the tried-and-true method by which a minority controls the majority, and it’s as old as governance itself.

However, the tyranny of the minority is beginning to crumble as the degree of corruption by the one-two party system has raised the level of disgust to the point where even the left and right are becoming not-so-strange bedfellows. When progressive Ralph Nader and Libertarian Ron Paul, on a televised Fox News show, agree that enemy number one is crony capitalism, there is hope. Of course, the vested interests hope that the wedge of ideology divides us enough to maintain their hegemony. But what unites us is stronger than what divides us, and I am certain that the ideological forefathers of progressives and Libertarians would agree as well.

John Maynard Keynes and Frederick von Hayek had great respect and admiration for each other despite their ideological differences. Keynes published his General Theory in the midst of the Great Depression, and he believed that his theory would “save capitalism” from the pernicious effects of the extreme inequality and high unemployment of the 1930s, which created fertile breeding ground for fascism and communism. It was Keynesian theory that provided the theoretical foundation for government’s increased role in stabilizing the economy as well as for providing a broader social safety net. Hayek was one of the leading Austrian economists of the 20th century, and it is the Austrian school which forms the basis for most libertarian economic beliefs. In response to the implications of Keynesian theory, Hayek published The Road to Serfdom in 1944, in which he argued that increased government planning would inevitably lead to an encroachment on individual liberties.

Despite the current attempt of Libertarians to vilify Keynesian economics, Keynes and von Hayek held similar views regarding government’s role in the economy. It may surprise Libertarians to learn that Keynes said he was “in deeply moved agreement” with the sentiments expressed by Hayek. However, they did have one very serious disagreement concerning the growth of government power and how it would eventually affect “the planners” themselves. In personal correspondence with Hayek, Keynes argued that “Moderate planning will be safe if those carrying it out are rightly orientated in their own minds and hearts to your own moral position.” Hayek, having left Austria because of the rise of Nazism, countered, “From the saintly and single-minded idealist to the fanatic is often but a step.” I think if Keynes were alive today he would agree that von Hayek’s view of the future was more prescient.

In essence, government is a redistribution mechanism. Between direct spending and transfer payments (like Social Security, pensions and Medicare), government influences almost $6 trillion a year. That’s a lot of slop for the pigs at the trough, and it didn’t take long for industrial interests to latch onto this pork barrel. In 1960, president and former general Dwight Eisenhower was warning us about the growing influence of the military-industrial complex. (In fact, reportedly the penultimate draft of Eisenhower’s speech included Congress in this nexus, but it was deleted to appease some of his congressional friends.) Despite Eisenhower’s warning, we have allowed this system to expand and spread its corruption beyond the military-industrial nexus to other mega-industries like finance and pharmaceuticals.

It is this corporatist control of government that is now coalescing the 99 percent. From generous tax breaks for mega-industries and hedge fund managers to trillion-dollar backdoor bailouts for Wall Street banks to $2 trillion the Pentagon can’t quite account for, we know the game is rigged for the one percent.

Now that we’re three years into the economic crisis and unemployment remains exceedingly high, what’s to be done? Here’s the conundrum for progressives: If we accept that government is the problem, then shouldn’t the solution be less government, as the Libertarians say? No and yes. For example, in the near term, if we followed Ron Paul’s suggestion and cut $1 trillion in government spending in one year, that draconian “fix” would send the economy into a tailspin. In the short term, government action can help reduce unemployment. However, in the long term, when the private sector is growing steadily and unemployment is reduced, that’s the time to rein in government spending.

Are there less intrusive policies on which a majority of the 99 percent might agree? If big financial interests caused the crisis, then received trillion dollar bailouts, shouldn’t they also help pay for what they wrought? Certainly a majority of the 99 percent would agree with economists Dean Baker and Robert Pollin, who support a financial transactions tax. Taxing short-term financial transactions would help reduce the casino-type activity that currently dominates trading, and it would help promote long-term investing over short-term gambling. In fact, we could use the revenues generated by this tax—estimates range between $40-$100 billion annually—to fund much needed investments in public infrastructure, like roads, bridges, and sewers, which are the types of public investments that support and promote private-sector economic growth.

Two recent studies from the Political Economy Research Institute provide some other interesting suggestions. First, PERI updated a study that compared the employment effects from $1 billion in military expenditures against alternative forms of public spending. Their results showed that an equivalent tax cut for households, or increased spending on clean energy, or healthcare or education would create 35 percent, 50 percent, 54 percent, and 138 percent more jobs respectively than the $1 billion expenditure on defense. These results suggest that if we cut defense spending by $100 billion (for example, by ending undeclared wars, as Nader and Paul agree we should do), then use half the funds to increase spending on education by $50 billion, the net result would be a decrease in the deficit (by $50 billion) and an increase in jobs.

If that doesn’t quite satisfy the less-government crowd, then maybe the latest study by PERI is more palatable? Between excess bank reserves and corporate cash, there is about $3.6 trillion sitting on the proverbial economic sidelines. The folks at PERI suggest that a combination of incentives, tax credits for focused investments, and small business loan guarantees could be used to unclog $1.4 trillion of this stagnant cash, transforming it into active business spending, which could help push the unemployment rate down to five percent. What’s not to like?

It’s really not that hard to fix the economy; however, it is extremely difficult to break up the entrenched financial-political nexus that controls the government redistribution mechanism in their interests. Do we need to destroy government in order to fix it? For those currently struggling to get by, that solution would create more harm than good. Maybe Keynes was right: It’s up to us to elect people across the political spectrum who are orientated toward our own moral positions. Even though Bernie Sanders and Ron Paul are ideological opposites, I know they have moral integrity, and I know they support policies that they believe are in the best interest of the American people, not the corporate personhood.

A house divided is easy to rule; and, as Lincoln warned us, divided against itself, it cannot stand.

Dr. Ted P. Schmidt is an associate professor in Buffalo State College’s Department of Economics and Finance and co-editor ofthe Heterodox Economics Newsletter.