The Role of Government in the Free Market Economy 2

The last several months have revealed the precariousness of the free-market economy, and we are again raising the question:  How can government more effectively foster renewed growth in our economy, through the demand side or the supply side?  The argument here is that government can play a more effective role on the demand side, that is, by fostering economic growth through direct monetary infusions to stimulate demand that would otherwise be lacking among the nation’s consumers and through progressive tax policies that redistribute wealth to lessen the economic disparity between wealthy industrialists and the working poor. 

Provided such policies are pursued only during economic recessions, when the risk in triggering inflation is low, the benefits to the economy are evident through public works and social programs. 

First is the provision of public goods (scientific research, public health, education, and infrastructure) that the market would tend to ignore due to either the high capital investment needed or inherent conflicts with the profit-motive.  For example, the influx of money into research could help bring about the development of new fuel-efficient cars, lessening our dependence on foreign oil; the development infrastructure in better roads and urban planning, can lead to a more efficient distribution of goods and services; investment in national health insurance, which pools the resources of the nation’s entire population of healthy individuals to cover the sick, can achieve significant reductions in health costs by cutting out insurers’ profits that dissuade funding healthcare for those who need it; and investments in education ensure that our population can meet the needs of a changing workforce.  Second, is the provision of social programs, a “safety net” to provide some form of subsistence when the population suffers unemployment or incapacity (e.g., due to disability or old age)—this accomplished through progressive income tax policies. Such programs have included social security and medicare, unemployment insurance, and even housing loans and mortgage insurance.

The proof is in the government’s war effort during World War II, when the country was still in the midst of the Depression, and when, along with programs that focused on improvements to the country’s infrastructure of roads, bridges, etc., government spending marshaled the excess capacity of the nation’s factories to build ships, planes, guns and artillery equipment, and bombs.   Social programs enacted as part of President Franklin Delano Roosevelt’s “New Deal” ensured a source of support for people suffering in troubled economic times.  The end result of what followed:  two decades of steady growth in the standard of living, a period in which the “American Dream” was realized by more Americans than ever before. 

It’s time again for the government to renew its commitment to helping steer all Americans toward that dream—by direct intervention in the market economy.  Some would argue such a policy smacks of “socialism.”  Ultimately, so what?  The reality is our economy has been a mixed capitalist/socialist economy for many decades.  The reality is blurred; just consider the similarity of the conservative goal of government non-interference or “laissez faire” and the Marxists’ ultimate notion of the state “withering away.”  Ultimately what matters is that we employ whatever reasonable means necessary to achieve the goal of growing our economy.