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The Growth of State-Dominated Capitalism in the USA
Raymond Richman, 7/21/2013

The Federal Government over the past eight decades has grown from 2.1 percent of Gross Domestic Product (GDP) to 10.7 percent while State-Local governments did not grow at all. As the following table shows, federal expenditures during the 1930s more than tripled, from 2.1 percent of GDP to 7.1 percent of GDP while State-Local programs declined from 8.9 percent to 7.8 percent.

Federal and State-Local Expenditures 1930-2012
(billions of dollars)

Year

GDP

Federal

Federal

Percent

State-Local

State-Local

Percent

   

Expendi-

Programs

 of GDP

Expendi-

Programs

  of GDP

   

     Tures

   

     tures

   

1930

91.2

1.8

1.9

2.1

8.2

8.1

8.9

1940

101.4

6.5

7.2

7.1

8.6

7.9

7.8

1950

293.7

26

27.9

9.5

20.7

18.8

6.4

1960

526.4

64.1

68.1

12.9

47.5

43.5

8.3

1970

1038.3

113.4

132.7

12.7

120.3

101

9.7

1980

2788.1

243.7

316

11.3

322.4

250.1

9.0

1990

5800.5

507.5

618.5

10.7

674.2

563.2

9.7

2000

9951.5

576.1

823.4

8.3

1154.9

907.6

9.1

2010

14498.9

1223.1

1754.2

12.1

1834.4

1303.3

9.0

2012

15684.8

1214.3

1682.3

10.7

1848.5

1380.5

8.8

Source: BEA. "Federal Programs" = "Federal Expenditures" + grants-in-aid to the States.
                   "State Programs" = "State Expenditures" - grants-in-aid to the States.

The new economic system in the U.S., introduced by the “New Deal” in the 1930s, can be described as state-dominated capitalism and is to be distinguished from the system of economically passive government and free private enterprise that existed before 1890. Our thesis is that state-dominated capitalism in the USA can be said to have grown significantly under the administration of Franklin Roosevelt with the policies of the “New Deal” and through the President’s successful attempt to force the Supreme Court to legitimize the expansion of the powers of the central government.

Others would date it from the passage of the 16th Amendment to the Constitution which put undreamed of resources at the disposal of the federal government and to World War I which thrust the U.S. to the forefront as the world’s leading power and established the dollar as the world’s reserve currency. Some would date the growth of state capitalism from the passage of the Sherman Anti-Trust Act of 1890, which claimed to protect consumers but ended protecting competitors. Few seem to have been aware of the transition from free markets to government-dominated markets over the following decades. It just grew; it just happened; it was not planned. Or was it?

The characteristics of state capitalism include what has come to be called “crony capitalism” and a plethora of power centers ranging from narrow groups called NGOs (non-governmental organizations), sometimes entities led by communists and other anti-capitalist groups. Congress has granted governmental agencies the power to regulate and legislate. The Environmental Protection Agency is an example; it can change the rules regarding what emissions are permissible at will. Another is the new Consumers’ Protection Agency, currently in the news. Congress, for all practical purposes, has placed no restriction on what it may spend or what rules it can put in place. What article of the Constitution authorizes the federal government to create such agencies?  President Obama appoints tsars to oversee and advise Departments of the Government. The former require no legislative oversight and hardy anyone knows what they do. Instead of transparency, government has become more opaque.

What history has shown is that governments waste enormous resources, because they spend someone else’s money, and that socialist enterprises, with almost no exceptions, are more inefficient than private enterprises whose own capital is at stake. Government enterprises, however ineffective and inefficient, keep going forever.

The fact is that the nation’s economy with its millions of participants is too complicated to be controlled efficiently. An economic system which allows its billions of decision-makers to make their own decisions is self-regulating by the forces of competition. Government intervention as a rule only makes the system work less efficiently, as we shall see.

The federal government is out of control. It has grown to the point where it has changed  the economic system. It created state capitalism, and, like its predecessors Italy and Germany, the result can be only national bankruptcy, perhaps international bankruptcy, and the disorder that it entails.

A case that illustrates the disastrous effects of government intrusions into the privatae sector of the economy is the Community Reinvestment Act (CRA) of 1977. It started with the noblest of motives, to help people in disadvantaged neighborhoods own their own homes. Allegations were made in the sixties that the banks were red-lining black neighborhoods, i.e., they were not making proportionately as many loans to households in those neighborhoods as they were in white neighborhoods. Surprise, surprise! Indeed, fewer loans per inhabitant were being made in such neighborhoods. But the conclusion that this evidenced racial discrimination was spurious.  Moreover, if the federal government wanted poor households to qualify for mortgages to own houses, all it needed to do was to guarantee them as they did with FHA and GI bill mortgages. No new bureaucracy needed to be created.

The CRA gave leftist groups – ACORN, the NY Agency for Community Affairs (NYACA), which shared staff and space with ACORN, the Union Neighborhood Assistance Corporation (NACA), and others -- the power to blackmail the banks. As a result, those leftist groups became powerful and rich beyond their wildest dreams with infusions of billions of dollars, including not only funds derived from the banks but from the government itself. Pres. Obama, before he began his political career, appeared as counsel for ACORN in a suit in Chicago against Citibank that alleged racial discrimination in its lending policies. The parties settled with ACORN getting appointed as an agent of the bank. A jury’s award of millions of dollars from a major bank in a case in California alleging racial discrimination, demonstrated to the banks that resistance to blackmail would prove more costly than cooperating with the blackmailers.

In 2006, the New York Agency for Community Affairs (NYACA), which shares staff and space with ACORN, reported a little over $1.3 million in income-producing activities. That same year, the organization paid close to $1.2 million for “contractual services” to ACORN. Bruce Marks, executive director of Union Neighborhood Assistance Corporation (NACA) and self-styled urban terrorist, is reported as threatening that if banks aren’t willing to meet the new standards of community investment, then “we’ll have to start making it in their interest to do so.” And indeed they have. His NACA acts as agents of banks usually with authority to approve mortgage applicants.  It receives a $2000 origination fee and had a budget of $10 million per year. ACORN made similar arrangements with a number of large banks, including Bank of America. A Senate Banking Committee estimated that as of 2000, as a result of CRA, such groups had received $9.5 billion in services and salaries. Groups such as ACORN also had received tens of billions of dollars from HUD and other agencies:

It is frequently stated that this recession was the result of bankers’ and Wall St. greed. Greed is often merely taking advantage of money-making opportunities.  It was not Wall St. greed, but legislators’ desires to appease supporters and foolish sentimentality that caused them to approve legislation to pressure the banks to make loans to unqualified borrowers. CRA was given teeth by Pres. George Herbert Walker Bush in 1989 in legislation that required the administrators of the CRA to rank banks on their lending activities and to deny banks the right to open branches or to buy other banks if they are rated low. Pres. Bill Clinton required banks to show the numbers of loans they made in their neighborhoods. And Congress made “blackmail” by neighborhood activists’ legal by providing for public hearings on the ratings..

Many journalists, public officials, and economists claim that the Community Reinvestment Act had nothing to do with the current recession; it was the banks and Wall Street greed that produced the recession. The CRA was amended during every administration. The rapid expansion of mortgages did not begin until the 90s. Once the banks in response to CRA pressures reduced their standards for collateral, etc., and Fannie Mae and Freddie Mac came to be seen as likely guarantors of mortgages, even those with poor collateral, the impression gained currency that the U.S. government stood behind those mortgages. The trillions of mortgages created to finance the housing bubble had to have a secondary market and that is what Wall Street provided. Once those markets were created, banks and other mortgage lenders began to compete to make loans easier to obtain, requiring less and less in the way of collateral, proof of value and causing standards to keep falling. The bubble was the inevitable consequence of government telling private banks how to lend and making it easy for nearly anyone to get a mortgage that he, she, or they could not afford once housing prices stabilized and began to fall.

The role of the Federal Reserve in this fiasco needs to be examined. It ought not to have accepted responsibility to administer the Act. It shared control with the Office of Thrift Supervision, the FDIC, and the Comptroller of the Currency, none of whom had any business forcing the banks to make risky loans. At least one benefit-cost study concluded the costs to the banks exceeded the benefits and that did not include the costs to the government of administering the program and the undeserved enrichment of groups like ACORN and other organizations. In any case, by now there can be no doubt. The lending policies forced on the banks created the worst financial crisis experienced since the great depression.

Another equally disastrous case is the implementation of policies under an international program – the President of Czechoslovakia who lived under Communism called it a hoax -- to reduce man-made climate change.  The hoax became clearly evident as a result of the scandal in East Anglia in which scientists his their data and conspired to prevent opposing views from being published in scientific journals.    

Government subsidies to “green” energy financed by government borrowing may be the principal cause of the economic crisis gripping the Eurozone and the world. According to a Forbes story, based on  a United Nation’s report, global investment in renewable energy reached $257 billion in 2011. China was responsible for almost one-fifth of total global investment, spending $52 billion on renewable energy last year. The United States was close behind with investments of $51 billion, Germany, Italy and India rounded out the list of the top five countries. In 2011, solar led the way as far as global investment in renewable energy, with investment surging to $147 billion, a year-on-year increase of 52 percent, due to strong demand for rooftop photovoltaic installations in Germany, Italy, China and Britain. Large-scale solar thermal installations in Spain and the United States also contributed to growth during the year. Wind power investment slipped 12 percent to $84 billion as a result of uncertainty about energy policy in Europe and fewer new installations in China, according to the report.

Spain was forced to end its subsidies to “green” energy last year because the subsidies brought Spain to the brink of bankruptcy and created few jobs. Unemployment in Spain is over 20%. Its trade deficit grew and the government was running out of euros.

Consider the economics of a solar farm. State and federal government subsidies including grants, guaranteed loans, free land, and tax credits amount on average to more than two-thirds of the required capital. The subsidy is financed by government borrowing and the debt service (interest) will have to be paid for by taxpayers as will the principal when the debt matures.

Solar and wind energy is more expensive to produce than energy from fossil fuels, estimated 15 to 25% more than energy from fossil fuels in the case of wind and more than that in the case of solar energy. The energy cannot be sold without a subsidy. To avoid a government subsidy, the states order the utilities to purchase wind and solar energy at their higher prices. The consumers of electricity, households and businesses end up bearing the costs. The utilities have other additional costs because they cannot rely on a constant supply of electricity from the wind and solar plants. They must have back-up capacity to produce electricity when the alternative sources are unable to function adequately.

The EPA has been given power by Congress to engage in a war on coal and other fossil fuels. The invention of fracking has enabled the U.S. to become energy self-sufficient by producing oil and natural gas from shale. But the EPA seems hell-bent on preventing the miracle of plentiful supplies of fossil fuel. They seem to be succeeding in their war on coal. They seem deliberately to be preventing economic growth.

The higher prices for electricity put U.S. manufacturers at a competitive disadvantage. Much of the solar panels and wind turbines and other parts are imported.  A minuscule number of workers are required to operate wind and solar energy plants. The required investment is sometimes a billion dollars or more and may require only forty employees.

Taxpayers are alleged to benefit by the reduction of emissions, principally carbon-dioxide. Carbon dioxide is not toxic. Indeed, a recent report suggests that increased CO2 in the atmosphere has increased agricultural productivity. Given that plants thrive on carbon dioxide, there are some benefits associated with increased emissions of CO2. It is alleged that man-made carbon emissions cause global warming. Some physicists believe that the sun’s effects on the amount of cosmic rays affects cloud cover and cause climate change not man’s activities.  An experiment is underway at CERN’s nuclear laboratory in Switzerland to test this hypothesis.   

Consider the other actions taken by government to reduce CO2 emissions: subsidizing hybrid vehicles and electric-powered autos that only the wealthy can afford, subsidizing insulation of houses, office buildings, and factories and solar heating, subsidizing the trade-in of older vehicles, etc., etc. All with no present or future return to the taxpayers and consumers on whom the ultimate burden falls.

That’s the economics of state capitalism.

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