Government Overreach and Dysfunction

HBUD: Reigniting American Growth and Prosperity Series: Removing the Burdens of Government Overreach, May 24, 2023

Public Administration scholarship features two paradigms related to this hearing: issue networks (aka Iron Triangles) and regulatory capture.

The first tells us that there is a symbiotic relationship between congressional subcommittees (both authorizing and appropriating), agencies and the corporate/contracting/advocacy sector. In other words, if the government is overreaching or, as is more likely the case, under-reaching or performing badly, it is because the system won’t let it perform well.  The Budget Committees have the misfortune of dealing with OMB and competing with the appropriation, revenue and authorizing committees while serving no particular industry sector except the most partisan political organizations. This is not a recipe for success.

The second is that for any regulatory agency to succeed, it must be captured by the industry it regulates. If it is not captured, it is constantly under attack. This can be a problem for such agencies as the Securities and Exchange Commission and the Commodity Futures Trading Commission because under-funding has led to federal personnel not being able to understand the world of the quants, since the quants are usually attracted to industry, not government. 

In the end, this leads to the inevitable collapses of the financial markets. Cryptocurrency’s rise and fall is the perfect example of this. Of course, sometimes, when arrangements are overly complicated, it is because they are fraudulent. Such was the case with credit default swaps in 2008.

Government is not the problem. It is unrestrained capitalism. The only way out is public finance of political campaigns, but with a twist. Parties should be the sole conduit of money and it should be evenly split during the primary season at a caucus where the candidates bring their supporters, with anyone getting over 15% attendance making it into the funding pool - with both ballot access and equal campaign dollars.

The basic premise of the series is that growth is anemic. My advice is to find someone else to do your stock picks, as growth is not anemic and it won’t be as long as housing prices take a soft landing rather than the kind of price collapse that occurred in the Great Recession. Had what Mr. Paulson had promised to be done - that is, bailing out borrowers rather than lenders, people would have kept their homes and the crisis would not have evolved into a Depression.

A depression is not just a bad recession. It is what occurs when asset prices are below the level at which they are financed. We may be headed there - but I hope not. The pandemic provided bailouts to the housing finance sector, which was full of junk that was about to crash anyway - which would have left Secretaries Mnuchin and Ross in quite the pickle, as they are heavily invested in single family homes, which they borrowed against - creating bonds that are basically of 2008 quality.

The iron triangle strikes again.

The recent oil shocks have been priced out of the market. Prices have begun to decline as inflation is no longer compounding. It still drives inequality, however, as prices chase the median dollar, not the median income family. If this were more widely known, the public would demand higher taxes on the wealthy and equal dollar inflation adjustments, rather than equal percentage cost of living adjustments.

Ultimately, growth is driven by the government. Public sector jobs, contracts and benefits are the first order yeast that drives private sector jobs (second order effects) and investments in plant and equipment (which are third order effects that have nothing to do with the markets. 

Both parties are captured by the rich and reward failure by allowing capital gains losses to offset wage and salary income. They drive inflation, as they pay percentage based wage adjustments. The President’s promise to hold 99% of households harmless in tax policy has concentrated the pain of tax increases to the only class of people with enough funds to fight them. Also, not raising taxes on the next 9% is inadequate to pay interest on the debt and balance the budget. This anemic tax performance builds investment accounts too such an extent that they contain junk that is rated as AAA. This risks another financial crisis.

Finally, let us look at the various items of government that do not overreach:

Aerospace

Roads and bridges (formerly inadequately funded)

Social Security (inadequately funded) 

Space exploration (inadequately funded - which is embarrassing)

Agricultural regulation (which is good at tracing food safety issues but not good enough to prevent them for occurring)

The Federal Reserve System and financial regulation agencies (which are too friendly to junk capital)

Transportation safety and air pollution from cars (which is totally captured by industry)

National Institutes of Health

There is some over-reach that should be identified

United States Postal Service - whose only problem is its pension burden to fully fund in order to force it into defined contribution arrangements which reward the financial sector)

The IRS, which can be eliminated by having the SEC collect an asset value added tax, while states collect credit invoice and net business receipts taxes - which are the Fair Tax without the dysfunctions of financial speculation and the inadequate funding of family support

The Intelligence Committee - which sadly must overreach, given the recent history of organizations such as the Oath Keepers and the Proud Boys - who are fascist revolutionary elements of the MAGA movement

The Drug Enforcement Administration, which fight all efforts at legalizing cannabis

National Science Foundation (which drives academic research toward private profit but at pay rates too low for graduate assistance and post-doctoral fellows to survive comfortably - even when Universities would rather pay them a decent amount)The military industrial complex, which demands higher security for personnel than is needed as well as the kind of bloat, as well as global deployments, which many see as unnecessary in peacetime.

I hope this brief tutorial was helpful. I suggest sending staff to some kind of senior political service training, which should also be available to members of Congress and administrative appointees, who are in desperate need of it.