Is less really more when it comes to government?

TheStar.com – news/world
Published On Fri Aug 05 2011.   By Olivia Ward Foreign Affairs Reporter

These are lean times, and the knives are sharpening for any fat to trim.

In Washington, a deal to lift the debt ceiling sparked $1.2 trillion in government cuts, with more to follow. Meanwhile, Britain wages jihad against public spending and Greece’s public service is on a starvation diet.

Ireland slashed its public service and ended tax credits while Portugal made deep welfare cuts and Italy could follow by chopping spending on schools and hospitals. In Toronto, the mayor is on a crusade to downsize city functions.

Throughout the West a bare-knuckle battle is shaping up between the forces of the public and private sectors and their political defenders. Some fear it’s a battle that will attack the heart of democracy, and the social contract that is its backbone.

Meanwhile, financial nerves are jangling as the bitter brinkmanship of the U.S. debt deal foreshadows new crises, and as worries spread over Eurozone defaults. Markets in Canada tumbled more than 3 per cent this week and Wall Street plunged more than 4 per cent on fears of a “double dip” recession.

The economic alarm bells also sounded a note of irony.

Even those campaigning the hardest for smaller government may suffer if more jobs vanish and the tax base shrinks, government funds to kick-start the economy disappear, and fewer people have the money or confidence to buy houses, cars and home theatres.

Will government be able to bail out corporations “too big to fail” the next time they turn up begging?

“It will be unable to fulfil many key functions, including addressing market failure as when the banking system froze up,” says economist Jared Bernstein of the Center on Budget and Policy Priorities in Washington.

“Without an amply funded government it would be much harder to get out of a mess like the financial crash or even the Great Recession.”

Until now, the size of Western governments resisted shrinkage, in spite of the voices clamouring for their reduction.

“When you look at Canada and the U.S., it isn’t that government is getting smaller, but it’s doing different things,” says economics professor Thomas Naylor of McGill University. “Instead of redistributing income from the wealthy to the poorer groups, it does the reverse.”

Adds Naylor, author of the recently published Crass Struggle: Greed, Glitz, and Gluttony in a Wanna-Have World, “Government is shifting to a more regressive role . . . and increasingly it is a creature of the corporate sector. The social contract is being rewritten: it’s a contract between government and corporate barons.”

With that has come greater emphasis on defence and security, whose budgets have escalated in the 21st century. But the prospect of even the Pentagon’s sacred cows being gored has propelled drops in defence-related shares in the U.S. And it adds to a climate of insecurity that hovers around Western markets.

Already, there is talk about an American “QE3” or new quantitative easing if the economy continues to stall. That would mean more funds pumped into the economy by the Federal Reserve and more years of near-zero interest rates.

But the demand for government “fat trimming” will continue — in spite of liberal arguments that more rather than less participation is needed to pull countries out of their slump.

“Our blind spot is because we are drunk on individual freedom, which is the teenage stage of maturity,” says Terry Mollner, a founder of the Calvert Social Investment Funds, based in Massachusetts. “The next stage is when you learn to work with others for the common good. That is what people on the eastern side of the planet have learned, but we haven’t.”

The theme of “less is more” isn’t new, says David Rothkopf, a former senior official in the Clinton administration and author of the forthcoming book Power, Inc.

“It was championed by Ronald Reagan and Margaret Thatcher, and has spread over the last 30 years. Government is a drag on economies and ought to be rolled back. Now we’ve seen the consequences in inequality.”

“Small is beautiful” is the war cry of the conservatives who followed. But while the rhetoric touted smaller government, big business became more muscular.

In North America inequality has been growing steadily, and to some, alarmingly. While there is political pressure to shrink government’s ability to regulate the economy and redistribute wealth, the private sector has gained in weight and power with strikingly visible results.

“Approximately a quarter of all income in the U.S. now goes to the top 1 per cent, while most Americans’ income is lower today than it was a dozen years ago,” Nobel Prize-winning economist Joseph Stiglitz writes in The Guardian.

And, he adds, the way out of the U.S.’s debt crisis must be through spreading the pain of the recovery more fairly, which means increasing taxation for the wealthy — a move right-wing politicians steadfastly oppose.

“The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment and high social distress — and even when it is a consequence of their own mistakes in lending,” Stiglitz argues.

The U.S. is at the sharpest end of the debate on the size and role of government, because its fate affects the rest of the world like an economic pandemic, as this week’s market plunge shows.

“We’re at a very unique moment in history,” says Bernstein, a former adviser to Vice-President Joe Biden.

“We have a vocal minority from the far right wing of the Republican Party that wants to shrink government both in role and size, and has been very influential. They’ve succeeded in making politics dysfunctional, but although the government’s ability to deliver services and support is under attack, we aren’t there yet.”

America’s social safety net is still in place, but that could change soon. And with sweeping job losses, more middle-class people have fallen into poverty. While the income of the very richest has soared, the wages of working men have fallen by 12 per cent.

But so far the debate on what government should or shouldn’t do about these crucial issues is limited to insults hurled across the political aisle.

“Extremism has made it very uncomfortable now for people to have an open discussion,” says William Yeomans, a fellow of American University’s law faculty in Washington and a former chief counsel to Sen. Edward Kennedy.

“The radical right-wing agenda is against what it calls ‘redistribution,’ and it doesn’t think people should pay taxes to support those less fortunate.”

A new crunch is approaching with the expiry of President George W. Bush’s tax cuts at the end of this year, as well as a renewed battle over prospective government cuts.

“The timing couldn’t be worse,” says Yeomans. “We have more people in need than we’ve had for a very long time. We have a society desperately in need of rebuilding. Instead of cutting we should be stimulating the economy, figuring out ways for it to grow. Instead we’re in danger of replicating (the double dip recession of) 1937.”

The worst crisis that ordinary Americans face is unemployment. And the outlook for government programs to combat it is stormy.

“Obama is making the mistake of thinking if he shows the Republicans love they’ll love him back,” says Mollner. “If he gives in to reducing tax breaks for mortgage interest, health insurance and retirement savings, as well as reducing the top tax rate, it will be good for American jobs.

“But what happens if the corporations fire thousands of people and take the jobs to China. If we give money to the rich, they will invest it wherever they can make money, which they legally have to do. Yet it’s the American people who bail out the corporations. And reducing government spending will only end up cutting many of their jobs.”

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