The debate of Big vs Small-government (part 1)

A hotly debated topic these days is in regards to the proper role of government in stimulating the economy.  The worry on one side is that without government spending, the economy would fall into a deep recession.  The worry on the other side is that government would become overbearing and crowd-out private enterprise.  In my opinion, both arguments are compelling, and probably each are ½ right.

To defend the position of increased government spending, I previously argued that if private investors only wanted to give their money to the government (by pouring money into Treasuries, and shunning all forms of risky investments), then the government had a responsibility to recycle those funds and reinvest them back in the private sector.  I also argued (here) that if the credit markets were frozen and if the financial system was broken (as it was), then traditional monetary policy wouldn’t work, leaving only the only tools of fiscal policy to shock the economy out of a crisis.

But, to defend the second position (that fiscal stimulus was dangerous in the temptation to increase the size of government, and decrease the role of free enterprise), I also argued repeatedly that the stimulus plan (as passed) was (a) not going to work, (b) too small and misdirected, and (c) just a bandaid: a temporary measure to buy time to fix the root of the problem: the deleveraging of the financial system.  See my suggestions of what to do here.

In addition, I also would like to add that I believe there is too much wasteful spending which is being attributed to “Keynes” without much true economic justification for that spending (other than to quote “Keynes”).  Supporting this position, I welcome my readers o see an article here from Benn Steil.  This point was recently driven home personally when I visited my wife’s aunt (who is a local artist in the NE of Brazil), and saw that she was reading an article on Keynes and his justification for spending to stimulate the economy.  At that moment, I knew we were experiencing a Keynes-bubble in the popular press (globally), and my conclusion was that this fascination with Keynes must be unhealthy for true discussion on economic theory by serious professionals.

Another insightful analysis comes from Amity Shales here about FDR and the new Deal…questioning the rise of big government (and the resulting decrease of free enterprise).  Read both carefully, and see if you don’t hesitate before signing up for the next spending plan based on either “Keynes”, or on “FDR/ new deal” economics.

The debate of big vs small government (fiscal vs monetary policy) is intense, real, and probably just heating up.  I expect to see more philosophical debates along these lines over the coming months / years.  At the moment, the momentum seems to be tipping (temporarily) away from free markets and toward big government stimulus.   While this debate dates back generations (see Wikipedia articles on both Keynes and Friedman), the more recent trend seems to be one in which Keynes is back in fashion, and the monetarist’s influence has faded slightly…  Time will tell, but Ill bet the pendulum will eventually swing back.  This debate is old, ongoing, complex and not done yet…

Part 2 of this article is coming soon…

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Read more on U.S. Economic Cycles at Wikinvest

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Originally published at Globo Trends and reproduced here with the author’s permission.