Free Markets: An Unknown Ideal

President Obama, Governor Rendell, and many in the media have been echoing a similar refrain recently, "Conservatives had their chance.  We tried free markets, and they failed."  When exactly they think citizens enjoyed free markets is unclear, but it certainly did not occur under the presidency of George W. Bush or under Gov. Rendell.

Over the past eight years, federal, state, and local government spending increased from 30% of U.S. GDP to 35%, hardly indicative of a free market. Economists warn that when government spending exceeds 25% of GDP, it hampers economic growth. So why are so many calling for additional spending to cure our economic woes?  

Pennsylvania is exemplary of why government spending doesn’t stimulate the economy. State spending has increased 36% under Rendell. Pennsylvania ranks second to Ohio in "economic development" spending, yet lags well behind the nation in economic growth (as does Ohio).

Under George W. Bush, the federal government dramatically increased spending on education, transportation and infrastructure, alternative energy, health care, corporate welfare, and pork barrel projects. Congress passed an "economic stimulus" in 2008.  Under Rendell, Pennsylvania dramatically increased spending on education, transportation and infrastructure, alternative energy, health care, corporate welfare, and pork barrel projects. Pennsylvania enacted an "economic stimulus" plan in 2004.

Yet the prescription for stimulating the economy offered by Obama and Rendell represents more of the same failed policies of the past.

Likewise, the financial crisis is often blamed on deregulation, yet deregulation never occurred.  Indeed, under Bush, Congress passed one of the most onerous financial regulations in Sarbanes-Oxley, and added more than 1,000 pages per year in regulations to the Federal Register.  

Rather, the mortgage crisis was a failure of government.  Government actors, including Fannie Mae and Freddie Mac, and the Community Reinvestment Act encouraged subprime lending.  The Federal Reserve’s effort to manipulate the U.S. economy by lowering, raising, lowering, and raising interest rates contributed to the boom in housing sales and prices, and then to the rise in mortgage defaults and foreclosures.

On health care, Obama and Rendell claim the free-market system has failed to deliver.  But there is no free market in health care—families spend as much in taxes for government health care programs as they do for their own coverage. Yet government programs provide lower-quality care than private coverage—in fact, even the uninsured typically get better care than those on Medicare and Medicaid.  

The heavy hand of government in regulating health care denies consumers basic choices.  Would you like to buy a lower-priced insurance plan with fewer covered services?  Sorry, the state won't let you.  Want to buy a lower-cost plan regulated by another state?  Sorry, that is illegal.  Interested in Wal-Mart’s $4 prescription drugs?  Too bad, Pennsylvania law says you must pay more.

Americans did get a round of federal tax rate cuts—which fostered economic growth.  But despite these cuts, the U.S. tax burden is now higher than it was in 2002, and taxes consume 31% of our national income. Furthermore, federal taxes are scheduled to increase in two years. And it is abundantly clear that the tax code is far too difficult to follow—even for the man appointed to oversee the IRS, much less the general public.

At the state level, Pennsylvania's state and local tax burden is 5% higher than it was in 1991.  Once again, Pennsylvania policies have undermined economic growth. Like other states that rank high in tax burden or growth in tax burden (Pennsylvania ranks near the top in both categories), the Commonwealth has a stagnant economy.  States on the other end of the tax spectrum have had strong economic gains.     

Blaming free markets for our current economic conditions is arguing against a straw man.  Neither the United States nor Pennsylvania has seen anything resembling a free market, or even a move in that direction.  Rather, the size, cost, and power of government have expanded.  As the axiom goes, "you can grow the government, or you can grow the economy, but you can’t grow both."  We are now seeing that axiom being proven once again.

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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.