By Murray Weidenbaum, Foundation for Economic Education
The government of the United States is in the midst of debating major new undertakings, ranging from health care to climate change to energy development to tax reform. Â Yet far more fundamental is a basic but stealth shift in national prioritiesâ€”in the form of a rapid and pervasive expansion of government power over the private sector of the economy.
Although no serious discussion is occurring in the nation about the desirability of shifting economic power from individual decision-makers to the national government, that shift is a basic characteristic of virtually every policy proposal being debated in the Congress.
Take tax policy. Â A 131-page document (pdf) issued by the Treasury goes way beyond recommending the extension of some of the expiring Bush administration tax cuts. Â For example, the fine print contains over a dozen ways of discouraging American firms from doing business and investing overseas. Â Supposedly minor technical changes also would have a severe impact.
For example, eliminating LIFO (last in-first out) inventory accounting will raise business taxes over $60 billion in one decade. Â The Treasury also wants to revive four corporate environmental taxes that were eliminated in 1969. Â These four arbitrary taxes have no relation between the tax burden imposed on a company and the pollution that it generates. Â This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was. Inevitably a variety of technical tax provisions will increase the paperwork burden on business. Â The penalties for failing to file information returns (such as Form 1099) promptly and accurately are raised in a very complicated fashion involving three tiers of penalties.
On the expenditure side, the typical stimulus project increases the power of government in private business decision-making. Â The bailout of the automobile industry is really an inefficient method of financing union pension and health plans. Â The stockholders are zapped and the bondholders poorly treated. Â The taxpayers are left holding the bag, especially considering the restrictions on General Motors importing the really fuel-efficient cars they produce overseas. Â Apparently, the new General Motors factory for building compact cars was chosen on the basis of â€œcarbon footprintâ€ and â€œcommunity impact.â€
It is hard to keep a straight face when analyzing the new â€œcash for clunkersâ€ program. Â For example, owners of the biggest old clunkers get a $3,500 credit for trading in the old vehicles for a new one with an improvement of just one mile per gallon. Â Surely, it would save energy if the Treasury just mailed the $3,500 checks directly to Detroit!
Of course, the Obama administration is making some reductions in federal spending. Â It is reportedly imposing a 9 percent reduction in the budget for the division in the Labor Department that polices fraud and other illegalities on the part of labor unions. Â As noted below, a simultaneous expansion of business-oriented antitrust enforcement is taking place.
Turning to regulation, one of Ralph Naderâ€™s biggest disappointments during his heyday as a consumer advocate was the failure of his proposal for a new Consumer Protection Agency. Â However, the administrationâ€™s financial regulatory plan creates a powerful new Consumer Financial Protection Agency (CFPA).
This new free-wheeling agency takes authority now divided between the Securities and Exchange Commission (SEC) and the Federal Reserve System. Â In a change guaranteed to cause confusion, the CFPA will share authority with the Federal Trade Commission. Â The new regulatory agency will also have a mandate to give consumers more economic education. Â Educators find that especially scary.
Moreover, the agency will have its own money pot, independent of the normal congressional appropriations process. Â It will be financed directly by fees assessed on â€œentities and transactionsâ€ across the financial sector.
The Treasuryâ€™s financial plan contains many other expansions of government power over business. Â The Federal Reserve System is given new authority to oversee any large financial entity whose failure the Fed thinks could generate â€œsystemic risk.â€ Â The Treasury heads a new Financial Services Oversight Council to â€œresolveâ€ the inevitable jurisdictional disputes among federal agencies. Â A new Office of National Insurance is to be established in the Treasury to monitor â€œall aspects of the insurance industry,â€ a sector of the economy traditionally under the province of state governments.
The SEC will require the registration of all advisers to hedge funds and other private pools of capital with assets over a given threshold. Â It also will have the power to inspect the books of the advisers and to ensure compliance by their clients. Â In addition, the power of the SEC will be expanded by legislative proposals to give it a more active role in guiding the compensation committees of all public companies.
The Federal Deposit Insurance Corporation will have new authority to take over and shut down financial institutions (not just banks) whose failure is deemed to pose â€œsystemic risk.â€
Viewed in their totality, these technical financial changes would represent a historic expansion of government. Â Sadly, there is little comfort in the Treasuryâ€™s warning in its 88 pages of detailed proposals: Â â€œMore can and should be done in the future.â€ Â Comparisons with the New Deal of the 1930s are too timid. Â Shades of Alexander Hamilton!
The complicated climate change bill that recently passed the House of Representatives is a dramatic example of expanding government power over the economy. Â Again, the fine print deserves far more attention than it has received. Â For example, buried in the 1,201 pages of detail is a provision authorizing the Department of Transportation to require automotive manufacturers to produce vehicles that can run on methanol (wood alcohol), a fuel not widely available.
Other provisions, as expected, have little to do with the subject of global warming. Â For example, contractors on some energy projects must pay employees at least the locally â€œprevailing wage.â€ Â It is well known that, in practice, that means paying higher union wage scales.
Many federal departments are trying to climb aboard the economic stimulus bandwagon. Â The Department of Justice wants to help out by showing that antitrust should be a â€œfrontline issueâ€ in the response to the problems facing the economy. Â Apparently, business is not getting sued often enough. Â Incredibly, one new assistant attorney general views antitrust enforcers as â€œkey members of the governmentâ€™s economic recovery team.â€
When we step back and try to add up all the tax, spending, and regulatory actions and proposals of the new Obama administration, the result is clear: a cumulative squeeze on private decision-making and a more slowly growing economy in the years ahead.
In the process, private businesses will be discouraged by a host of government policies from making major new investments, especially those of a long-term nature with payoffs far in the future. Â Key negative factors are the likelihood of higher taxes and greater inflation resulting from the huge budget deficits that are likely to arise in the next several decades, abetted by lax monetary policies.
The American public is likely to have a long wait until the national unemployment rate gets back down to the 7.6 percent that was reported when President Obama took office in January 2009.
One fundamental point deserves to be stressed. Â In the inevitable tension in public policymaking between economic prosperity and income redistribution, for the next several years the American people can expect that income equalization will get the governmentâ€™s priority over improvements in peopleâ€™s living standards. Â The average American, at best, will receive a more equal slice of an income pie that will be far smaller than the public expects.
Murray Weidenbaum holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis, where he also serves as honorary chairman of the Weidenbaum Center on the Economy, Government, and Public Policy.