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An analogy is appropriate. Think of the U.S. as a vast ocean, a small community as a small ship in the ocean and the current global recession as an oceanic storm. When the people expect their local leaders to solve the global economic recession’s negative effects on their small community, they are doing nothing more than throwing the captain of the ship a bucket and saying, “Here, bail out all of the water.”
This is flawed for two reasons. The first flaw is that the government, especially a lower-level government, like that of a smaller city, has very limited power with which it can repair the economic downturn. First of all, city governments have unfunded mandates from the county, state and federal levels of government, the spending for which cannot be reduced.
Second, city governments are dependent upon higher levels of government for some spending, such as shared revenue and various types of grants, so cities are thus unable to reallocate resources as necessary, since the city governments often have little or no discretion over how this money is spent.
Third, cities are subject to “city limits,” an idea espoused by scholar Paul E. Peterson, in his book of the same name. It argues that, due to the openness of cities’ borders and their inability to move, they must compete with other cities for residents and businesses, since these people and businesses can move to another city if their current city is unsatisfactory in some way, such as taxation or provision of services. Thus, cities are forced by the market to keep their taxes relatively low and their services relatively satisfactory.
The second flaw is that government involvement in the economy often produces negative, usually unintended consequences. Some intended negative consequences can be seen by reviewing the Bernanke Doctrine, the central-planning philosophy of Ben Bernanke, the Chair of the Board of Governors of the Federal Reserve. His doctrine includes using the Federal Reserve to depreciate the value of the U.S. dollar (in other words, cause inflation, which hurts the lower and middle classes), print a lot of money and lower interest rates to zero percent. Printing a lot of money causes inflation. But why are low interest rates bad? Well, former Federal Reserve Chair Alan Greenspan lowered the interest rates in an attempt to stimulate the economy during a slight economic decline following the Sept. 11 attacks.
This did stimulate the economy by encouraging more people to spend money, since the interest on their loans was now lower, and it discouraged saving, since the interest rate gained was now lower. This artificially-high level of spending, combined with lack of saving, “blew up the housing bubble.” Everything seemed great for a while, and then the bubble burst in 2008.
Government’s involvement in the economy, as noted, often has unintended, negative consequences. Staying on topic, the housing bubble was somewhat blown up by the Community Reinvestment Act (CRA), passed in 1977 and later given “teeth” in order to force compliance with lenders. Its purpose was well-intended: helping poorer people get loans with which to buy houses. Well, there was a reason banks, operating in the relatively free market, chose to not give loans to such people: it’s an irrational, high-risk decision. Since poorer people are bigger credit risks, what would banks do in order to offset the added risk of giving out these now-well-known sub-prime mortgages? Banks would charge higher interest rates, or something similar, on sub-prime mortgages. Now, from a business standpoint, this makes sense. But in other ways, does it? Poorer people are charged more on their mortgages, but they are the least able and least likely to pay their loans back. This law was a disaster waiting to happen, and it happened.
Some may question whether the Bernanke Doctrine is well-intended, which causes inflation that harms the lower and middle classes by forcing them to pay higher prices and by reducing the values of their savings accounts and retirement plans. What does the Bernanke Doctrine do for the rich and for banks? The rich own and manage businesses, which make more money due to inflation, so inflation essentially benefits the rich. As for banks, this zero-percent interest rate plan provides banks with a lot more business. Should we be surprised that the Federal Reserve, which is a central, independent, bank, promotes a policy to benefit its rich banking buddies, even at our detriment? H. R. 1207, the “Audit the Fed” bill, has a large-majority support in the U.S. House for good reason.
Another example of supposedly good intentions with bad consequences is the “Cash for Clunkers,” or CARS, program. It, like most government programs, benefits the rich and hurts the poor. The poor are unable to afford new cars, thus making them ineligible to get the rebate from CARS. The rich can afford to buy new cars in exchange for their clunkers, so the rich get the rebates. As for businesses, the richer car dealerships sell the new cars, which are the dealerships that get “more” business from CARS. The dealerships that sell clunkers are hurt because many clunkers now get destroyed instead of sold through these clunker dealers. Mechanics and junkyards also get less business now, since they usually get a lot of business from clunkers. The poor tend to buy many of the clunkers, and now that the supply of clunkers has been reduced, ceteris paribus, the price of the remaining clunkers will go up, hurting the poor.
What has CARS accomplished? Few of the new sales wouldn’t have occurred without CARS. Many people with clunkers would have exchanged them months ago, but they waited to see what the federal government would do about it, so they all rushed to the federal trough when CARS was passed. Also, other people may have planned on exchanging their clunkers next year or the year after that, but they sold their clunkers early so they could get the CARS rebates. So, CARS created an artificial boom during its run, and it will create a bust in the near future, since all of the clunker sales that would have taken place in the near future have instead occurred early. This boom-and-bust economic cycle is exactly what the government supposedly tries to avoid. A freer market is thus inherently more stable.
What CARS will not do is save the auto workers’ jobs. If auto companies start making more new cars to refill the new-car dealers’ lots, those cars will sit there again and these auto companies will be creating way more cars than the public wants, so they will need another taxpayer bailout.
What should a city government do? Well, obviously it should do what it can without producing many harmful consequences. This may include allowing private companies to compete with public providers of public services to ensure that these public providers are not wastefully costing more than the market rate. The net difference is that less tax dollars are being wasted, which is always a good thing.
Also, less tax funding for some programs, such as high-school sports, is also economically sound and fair. Many taxpayers resent the fact that they are taxed by the Neenah Joint School District. But this is defensible under my business-like economic philosophy because publicly funding education is an investment—a better-educated society spends more money, creates more jobs, makes more money, pays more taxes, commits less crime, leads better, elects better leaders and so on. Well, then why should taxpayers be forced to pay for sports programs? They shouldn’t be, at least they should foot less of a bill than they currently do. The families of these athletes, and private sponsors, should be footing more, or all, of this bill.
A mayor, even a strong-mayor form, like the city of Neenah has, as opposed to the part-time, weak-mayor form of Oshkosh, has limited powers, due to our suspicion of centralized executive power. A mayor mostly amounts to a cheerleader, being the city’s diplomat for meeting with business leaders, as well as taking stances on certain issues and advocating them, such as the one about sports funding, mentioned above.
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