Govt 2: The role of the federal Government in America (v1.0)

Today there are lots of different opinions on what the role of the federal government is. Should it be big government or small government? Democrats are storming ahead with expanding the role with big budget bills in Congress while Republicans are trying to block some of it. Nobody really disagrees that the federal government should at-least take care of defense and law and order, infrastructure, money supply and the Federal Reserve, foreign relations and trade, immigration and border control, federal land management, and emergency assistance like FEMA. Especially after COVID, national health management and disease control is also not disputed.  However, after that it gets blurry. To really answer this question, I look at it from the prism of capitalism – what its shortfalls and failings are when practiced in an unfettered way, and what the role of the federal government should be to address that. To me that is an especially important part of the rest of what a federal government’s role should be.

I am a big fan of capitalism. It is the goose that laid the golden egg and brought unparalleled economic prosperity and growth to many in the US. However, I do not know of any country that has unfettered capitalism. Capitalism must be tamed, and its rough edges sanded down to work better. That aspect is what the rest of this article focuses on.

One of my main concerns with capitalism is the creative destruction and renewal process can crush the people who struggle to adapt. Examples are globalization, technology change, automation, and the economy squeezing out ever more efficiency. Jobs are destroyed and people get crushed at least temporarily. Also crushed are those who cannot compete effectively in a capitalistic system due to a variety of reasons like disability, mental impairment, lack of funds to train or retrain, and discrimination. Also crushed are those who suffer huge losses due to natural disasters often due to lack of will to address climate change due to special vested capitalistic interests. Lastly there is the tragedy of bankruptcy or impoverishment due to unemployment, sickness, or old age. I know some people say it is all their fault. I believe often these are false. Anyway, society cannot let all these people perish or doom them to prolonged poverty. There must be support systems. These support systems are separate from vanilla compassionate safety net programs for the very poor to provide a bare minimum standard of living (I am however not a big fan of extending much support for the healthy employed able bodied middle class or trickledown economics that skews policies to the rich). This to me is the other side of the capitalism coin – the human side. This is part of the implicit capitalism bargain the state made with the people. They agree to live under capitalism if the state cushions some of its damages. People of free will, will not agree to a system if it crushes them.

What will happen if this implicit bargain between the state and the people is broken? The people need to see a net gain to continue to live under capitalism happily. If capitalism crushes more people or the people do not see a net gain, there could be major social or political disruptions or even violence. Many of Trump’s supporters were seriously hurt by capitalism like blue collar manufacturing workers and coal miners as these industries were decimated. A few supporters were prone to violence or lacked respect for democracy. Could it be because their representatives who are the living embodiment of democracy gave them nothing useful? However, many were desperate and wanted to believe Trump. They are clinging to it even now and are not giving up easily. Unfortunately for them there are numerous recorded instances of Trump not telling the truth (Washington Post count: Trump’s false or misleading claims total 30,573 over 4 years - The Washington Post), he was twice impeached, he was found guilty of sexual abuse, he was found guilty of fraud and heavily penalized, he was found criminally guilty of falsifying business documents to conceal payments to a porn star, he was criminally indited for obstructing recovery from his property of highly classified documents, he was criminally indited for Jan 6 and his attempt to steal the election, and no, manufacturing and coal did not come back under him. Maybe it is hope they are really hanging on to? There is a possibility Trump’s rise was fueled partly by people seriously hurt by capitalism.

Some people argue that we got Trump because of Clinton’s campaign malpractice. But let us ponder over this. Why would so many people follow him not once but twice and most continuing to follow him after he lost the election despite his many known flaws and failures and his absurd voting/democracy assertions? To me that signals a deeper macro politico-economic malaise rather than the actions of any politician or mistake of any campaign. Some in the left are also trying to give many such people promises like Medicare for all which I consider unrealistic. They better be careful they do not unchain the Kraken if they set expectations and fail to deliver. I am not hostile to some form of universal healthcare, but I would like the politicians to make the necessary tradeoffs and really tell us how they are going to pay for it.

We do not need populist or demagogues either on the left or the right. What we need is somber policy tradeoff between the economic side of the capitalist coin (which includes deficits and budgets) and the human side. Balance is the key. It is hard work to make the tradeoffs. Given an opportunity to eat ice cream one would obviously say yes. The challenge is to say yes when you know you must pay for it. That is why I respect Moderates in both parties. They try to force such tradeoffs to be made. Democrats tend to favor policies that are more generous on the human side while republicans tend to be the other way around.

An article of faith among some people is that government should leave the free market alone. They say they should not pick winners and losers. But this is flawed. The time I think it makes sense for them to intervene is if national security is involved, if our economic future is heavily compromised without it, or if the free market is causing significant harm to the people or institutions or the economy. This is strategic intervention. An example is support for rare earth element mining in US since authoritarian China has a strangle hold on that market. Rare earth is hugely important in semiconductors and other critical places. Critical supply chains spreading to unstable or authoritarian countries (example China) for cheap labor can put the economy at risk.  Dependency on the semiconductor industry in Taiwan for advanced chips can also be very risky to our national security since China may invade. Sometimes these interventions can take the form of trade policy or even foreign policy. The semiconductor industry in Taiwan I suspect is part of US as well as Chinas foreign policy considerations.

To me climate is an existential threat and a national security threat as well as a huge economic threat. Consequently, it makes sense for the government to put its thumb on the fossil fuel industry as well as the clean energy industry. But I hope they also ride the market forces that are starting to blow in that direction and not waste money where it is possible to harness market forces to the extent possible. They have a strong tail wind!!!

Some people demand that regulation be cut down significantly or almost completely. This is unrealistic. Market forces run amok can cause harm. Companies optimize for profit to meet the demands of the market and do not feel direct motivation for cleaning up after polluting or invest to prevent pollution. Does not help their bottom line. Banks can make risky investments to maximize profits and lose large sums and wipe out their depositors. FDIC and banking laws are critical. Regulation controls the damage or avoids it – to the environment, consumers, and sometimes national security.

An article of faith among some people is that states should regulate and not the federal government. The US is too interconnected and interdependent for state level regulation to be effective for most cases. A patchwork of different state regulations would be a nightmare. I did not agree with California setting different emission standards for cars. They did it out of desperation because there was no political will in Washington to address looming climate and environmental threats. They did not do it because they thought they were the best authority to do it.

Successful companies grow big and accumulate enormous powers and start to kill off competition increasingly in unfair ways. They can then inflate profits by boosting prices, narrow choices, decrease pace of innovations, and doing other damage to consumers. Healthy and fair competition is essential to capitalism. Most people agree that antitrust enforcement is a key role of government.

A staple of some people is hostility to unions. They say the free job markets are sufficient. While well developed and competitive job markets is very prevalent in technology and skilled workers are in high demand, there are many industries where the employer has the employee over a barrel. Should the employee work in hazardous conditions? Should they be allowed to be stiffed on wages? OSHA adds regulations and unions help level the playing field to some extent in these industries. The unions themselves should also be regulated to make sure the leaders do not take the workers for a ride.

In summary, unfettered capitalism has significant drawbacks. There is a case to be made for compassionate capitalism. Failure by the federal government to address those seriously harmed could lead to major issues and may be one reason for the rise of Trump. Also, capitalism works better for the people with interventions like strategic intervention, regulations, antitrust enforcement, and unions. The federal government needs to step up to that.