Over the past nine months, government intervention in the economy has spread like a wildfire. From federally mandated executive compensation rules for companies and job roles that had nothing to do with the financial meltdown, to the ouster of General Motors (GM) CEO Rick Wagoner at the behest of the White House, to forcing banks to take and keep Troubled Asset Relief Program money, Washington's tentacles are reaching into the minutiae of private business dealings like never before. Setting aside the long-term philosophical questions this raises about the role of government in society, one short-term question is whether or not it will aid recovery. I do not believe it will.
A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product. Even before today's unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government's share to more than 40%. A single federal health-care plan would gobble up another 16%, putting more than 50% of the economy in government's hands.
Economists increasingly understand the Great Depression was prolonged by government intervention in trade, private industry, and banking. We have evidence from other countries, too. As Ireland's tax burden and share of GDP fell, the Celtic Tiger roared. Recent National Bureau of Economic Research findings show that Jamaica's pursuit of "social justice" policies has retarded its growth compared with its less interventionist sister island, Barbados. From 1960 to 2002, Barbados' per capita GDP doubled, but Jamaica's grew only 50%.
Government has an important and legitimate role to play in a growing economy. It should enforce contracts, create a level playing field for all businesses, and steadfastly promote the rule of law. U.S. entrepreneurs can take it from there.
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute. This article originally appeared in BusinessWeek.
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