The Micromanaged Economy
Two big events this week, one of which almost everyone knows about – the Democratic Convention in Chicago – and one that almost only economic policy wonks know about – the annual Jackson Hole Economic Symposium attended by most of the Federal Reserve governors. Both, however, will spotlight what is becoming increasingly true of our world: government seeks to manage the economy not just in its broadest contours but in its minute details.
That micromanaging trend has been long developing, and is now true of both main parties, albeit with different foci and in different flavors. It is predicated on the conviction that government should and can steer economic life, smoothing out the rough edges of capitalism and compensating for the many deficiencies of a free market.
Until the 1930s New Deal in the United States, that conviction was largely absent. Since then, it has become ever more deeply rooted, especially with the programs of the 1960s Great Society meant to address the problems of chronic poverty. And even though the modern Republican Party under Reagan was grounded in a rhetorical rejection of government management of the economy, actual Republicans in office at both the state and federal levels have been every bit as interventionist and willing to use the levers of government to attempt to manufacture economic outcomes.
The problem is that absent far more government action and expansion of powers, the ability of Washington or any state government to generate specific economic outcomes is either limited or takes a very long time, neither of which is satisfying voters. The result has been an ever-more unrealistic set of promises by government officials and people running for office. And that has been juxtaposed to the fact that for most crucial issues, they can’t do much at all beyond easing short-term pain. Easing short-term pain is, of course, something, but not what they promise and not what voters expect or demand.
The Biden administration has been faced the intense divide between improving economic numbers (falling inflation, robust job creation, wage gains) and widespread despair and anger over the state of the economy (which I wrote about a few weeks ago). The Harris campaign recognizes that inflation and the state of the economy remain top-of-mind for many voters, and in response, she made her first major policy foray last week. She proposed a variety of measures, ranging from an expansion of the child tax credit that expired at the end of 2021 to holding grocery companies liable for price gouging to capping the price of some medicines and offering assistance to first-time home buyers.
The Trump campaign has been less specific (big surprise) but has trumpeted broad tariffs on imported goods as a way to boost domestic production, though how that will lower rather than increase prices is anyone’s guess. Trump has also promised to increase domestic oil and gas production to lower energy prices, even though the United States is now producing more of both than ever before.
Yet the issue is not really the merits of these proposals. It’s that with the notable exception of the child tax credit, they are band-aid solutions to structural problems. On price gouging, it is largely an empty threat. Without aggressive state take-overs of, say, grocery chains, officials could only target Walmart and Kroger if prices rose too fast ahead of inflation and if officials could prove that those retailers were actually taking advantage of consumers and not just legitimately responding to price increases throughout the entire supply chain. Assistance to home buyers might help, but only when interest rates fall will housing affordability change for the better (we’ll get to that in a moment).
On the flip side, the reason the child tax credit was so successful is less about government doing something than about government doing less, namely lowering the tax burden for families with children, which then increases their take-home income. The credit micromanages nothing: it simply allows people to retain more of their income free of tax.
The argument here is not that we should bask in the free market and get government out of the way. It’s that in the United States especially, we have an unhealthy mix of moderate government intervention and an unfettered free market combined with maximum (and erroneous) expectations of voters that government has the power to change the economic trajectory right now.
Take health care, whose costs continue to rise and place an undue burden on tens of millions of middle-class workers and families. The United States has neither a fully private nor a fully public system. Medicare and Medicaid pay for tens of millions of the elderly and the poor; private insurance supplements everything else, but that in turn is funneled through a public mandate system created by the Affordable Care Act. So, we have a mishmash of public and private. The result is a massive government presence, not substantial enough to set prices and contain costs, but just large enough to add to a labyrinthine bureaucratic system. We spend a huge amount without much to show for it compared to other developed countries that spend less.
And then we have the Federal Reserve system. In Jackson, Chairman Jerome Powell will nod to the need to cut short-term interest rates after a draconian period of tight policy. He will speak wonk-speak about the job market and the risks of inflation. But underlying that speech is a set of assumptions that the Fed should and must manage the monetary aspect of our economy or else risk the kinds of crises that so destabilized society in the late 19th century and well into the 20th .
Yet for all the increasing micromanaging of the Fed, we still had the crisis of 2008-2009 and still had the dislocations of 2021-2022. That’s because the Fed lacks the tools to micromanage the whole economy and could never have anticipated Covid or its economic consequences. It is a powerful tool of government action during a crisis: the Fed can essentially create money via expansion of credit to banks. In rare moments of intense duress such as in 2009 and in 2020, its ability to be a lender of last resort might have been the difference between an economic crisis and an economic collapse. But then, even after the crisis has passed, the Fed acts like a constant gardener, and that means a level of micromanaging that assumes its ability to “steer the economy.”
Government is a vital glue and stabilizer. The dreams of free market zealots like Milton Friedman and the school of thought of Chicago economists ever since rightly identified government overreach as a problem but deeply neglected the many ways that the public good requires an actor whose motive is not profit. As the child tax credit demonstrates, the government can adjust policy. As the Fed in times of crisis shows, government can be a ballast when the worst happens economically. But the idea that in the United States, either state or federal governments have the power to produce specific economic outcomes is a fantasy that is fed by both politicians and voters. The result is small policies insufficient for big problems combined with a micromanaging by administrative agencies.
This isn’t going to change anytime soon. But there is a silver lining: American society remains so dynamic that even with sub-optimal policies and unreasonable expectations of government, economic life in the United States remains incredibly dynamic. That means that society continues to grow and evolve materially, not that nearly enough people benefit in real time. It means, in fact, that many people’s lives are constantly disrupted, by new technologies and new industries moving from one geography to the next. Government could do a much better job cushioning the disruptions of that dynamism and spend more effort on that. As it is, government often wastes time and money on small promises with small results, or in the case of Trump’s proposed tariffs, wastes time and money on big promises with huge costs that no one is willing to fund.
There is one more silver lining: we all of us can begin to break out of this cycle by not demanding of politicians and government things that they cannot deliver. The president cannot magically make prices go down or wages go up. Nor can legislation. Government can use its levers to nudge the economy in certain directions and provide substantial economic relief and support to individuals who are struggling. However, it cannot effectively micromanage. We should stop expecting it to.
Certainly, attempting to micromanage dozens, hundreds, or thousands of aspects of a national economy is not practical. However, there is one simple, discrete policy that, if implemented, would likely accomplish 90% of what we are hoping to achieve: a progressively accelerating tax on public and private wealth.
The money supply is a public utility, supplied by the government to conduct the nation’s business. It’s not intended to be hoarded by a few, beyond all need or reason, to the detriment of all else.
Essentially, this means delegitimizing the profit motive. I realize this is the foundational sacred cow (or better “golden calf”) that our country was founded upon. So I don’t expect a lot of initial enthusiasm for the idea.
Profit may make sense during the initial building phase of any endeavor – be at a career, company, or country. Yet when such an entity reaches maturity, the continued relentless search for profit eventually becomes cancerous and destructive. We need to do better
Interesting article and I credit the author for wanting to improve our current societal and economic challenges. I tend to agree with many of the observations, particularly the comment regarding the ability of governments to generate specific economic outcomes, or take more action, being limited without further expansion of its powers. Where I fundamentally disagree is the suggestion that expanding government power would in any way improve our country or any healthy society, especially long term. What this article does not acknowledge is that both governments and corporations/ private sector are all controlled by people, and unfortunately, people are fundamentally flawed. As such, both entities are motivated by the same limiting inherent human traits: envy, greed, power, and fear. The difference between Governments run by people and corporations/ businesses run by people is that a corrupt and dysfunctional Government will ruin an entire society whereas corrupt and dysfunctional corporations/ businesses will eventually go out of business (or jail). I'm not saying that corrupt business can't hurt people, they certainly can. I'm saying the magnitude for Government ruination and destruction is exponentially more dangerous than a corporation/ business. The founders of our country (even with their flaws), understood this principle and tried to limit the scope and responsibility of the Federal Government in our Constitution to the point of specifically enumerating its powers and delegating all other powers to the various state and local governments. They understood that Governments work best when their powers are limited and the elected officials are close to the jurisdictions they represent. Over time, we have completely moved away from this principle and given our Federal Government way too much power. Businesses are at least accountable to their shareholders/ employees, and certainly their customers over time. Business that do not function well will eventually go out of business and/ or lose market share. Large, bloated governments are not close to their citizens and effectively unaccountable, especially the agency bureaucracies that our government has created. In most cases, many of the domestic crises we have experienced in this country have been a direct result of Government involvement, overreach or over-correction. Businesses react to market conditions and regulations. Competition motivates them to push the boundary, innovate, create, and produce. Governments do none of that. Governments create nothing and produce nothing, with nearly all of them (with the exception of the Hoover Dam) incapable of being self-sufficient or supporting. Taxes are a necessary evil but not when they punish success, stifle innovation, and prevent individuals/ companies from taking risk. People don't mind "paying their fair share" especially when they know the dollars are being spent wisely and managed appropriately to avoid waste, fraud, and abuse; something that big Federal Governments do not manage well. Governments do play an important role for society, but not when they are picking winners and losers and not when they become unaccountable to citizens. Their role is to facilitate and maintain predictable, stable conditions and regulations, preserve market competition and freedoms, and protect their citizenry. Government will never be able to satisfy the innumerable choices, needs, desires, or wants of 300 million people. We need to get back to the basics and founding principles that restricted the Federal Government's power and deferred the remaining powers to the State and local Governments. We also need to stop demonizing each other if we are ever going to make progress to fix the real issues that are hurting our citizens. Our media has turned politics into a 24/7 reality show and forced people into distinctive political camps that are not consistent with real life and how ordinary citizens live day-to-day with their own families, neighbors, and co-workers. The media rewards and covers negativity while punishing politicians on both sides who actually try to work constructively on real issues. This construct is not healthy and sets are horrible example for our kids and grandkids. We all need to do better if we are ever going to fix this.