Grover Norquist, creator of the No Tax Pledge, famously announced that he aimed to shrink the federal government so small that it could be drowned in a bath tub. The current cast of Republican contenders, who have called for markets freer than Adam Smith’s and a government smaller than Madison’s, seem hellbent on completing Norquist’s radical quest.
In Adam Smith’s economy, markets are the most efficient solution to prices when casting involves rational, fully informed consumers and market decisions don’t have uninteded effects on third parties (externalities). Without these conditions, economists agree that government should intervene to correct the market.
The recent financial crisis reveals the differences between economic theory and reality. Derivative underwiters mistakenly gave toxic mortgage-based derivatives AAA ratings. When the toxic mortgages crashed, derivative holders who thought they had premium goods went down with the mortgages. It is not a coincidence that most Wall Street traders do not believe in a efficient market. (Anyone who believes in "beating" the market believes it's not completely efficient).
Despite this, GOP candidates have joined in a chorus of complaints opposing regulation of the financial industry. Many of the candidates have repeatedly lambasted Dodd-Frank, not for being misguided regulation, but for bringing any regulation of the financial industries.
But that's not the criticism standard microeconomics would bring.
The question with Dodd Frank should be two-fold: One, whether it prevents previous actions and, two, if preventative measures strike the right balance between preventing a future collapse and letting markets take care of themselves.
Another whipping boy of the current crop has been the EPA. Pollution is a textbook Econ 101 example of the kind of externalities that governments should intervene with to benefit society. Prior to the EPA, pollution was so bad that the Cuyahoga River in Ohio went up in flames, a "cost" to pollution borne by the public.
Abolishing the EPA and its regulations would probably lead to more jobs. Decreasing regulations almost always leads to greater economic output, and probably more jobs, but would come at the expense of the health and enjoyment of society.
Conservative University of Chicago economist Robert Coase developed the theory that governments should seek to correctly assign the negative consequences of pollution to those that create it. But instead of following a smart, market-based approach to pollution, Republicans have advocated abolishing the EPA with no proposed solutions to pollution problems, instead proposing free market fundamentalism as a cure-all.
Free market fundamentalism is nothing new, it has been going on for years. What’s shocking is the all-out assault on all federal government, including Richard Nixon's EPA and new plans that would shrink the government smaller than the Founders envisioned it.
Rick Perry’s senior moment two weeks ago is seen by many as the death knell for his campaign. But what’s more shocking than another Perry stuttering while delivering a canned line is the actual proposal. Perry's proposal cuts at key government agencies fulfilling specific constitutional duties.
The Department of Commerce may sound to the uninformed like just another needless federal government intervention into business, but it fulfills several constitutional powers. The Department of Commerce is primarily responsible for protecting America’s economic interests abroad, including international intellectual property rights and trade, fullifilling the Constitution’s rather clear power to "regulate commerce … between the nations."
Most appalling, Commerce controls the United States Patent and Trademark Office. If Perry’s comment is taken at face value, he would eliminate the agency that regulates all intellectual property. It’s hard to see Disney supporting a Perry campaign that promises to destroy their livelihood.
There could be more nuance to Perry’s plan, but if there was he couldn’t remember it. For Perry, as long as he was cutting, it was good. For further evidence, a Perry aide defended his forgetfulness saying regardless of which agency would be the third to go, it was a sound "conservative" principled idea. Or in other words, it doesn’t matter what you cut and how it affects society, as long as it’s a cut it’s "conservative."
That a radical re-invisioning of federal government could be considered "conservative" illustrates how far Norquist’s influence has reached. In recent years conservative, which used to indicate cautious and careful, has been misappropriated by radicals who want the federal government smaller than Madison's and Jefferson’s, replacing tried and true principles with no-tax dogma.
Photo Credit: GovRickPerry