A Remark on “The Question is not Big vs. Small Government but Smart Government”

[Prof. Dr. Mukerrem Hic]

Previous US government lacked “smartness” including for the financial
sector. President Obama has made the above remark, and it was used by
a number of prominent American thinkers (e.g. Fareed Zekeria). The
statement, however, needs some alteration. First, there is no doubt
that we need “smart government”. This was already in professional
economic publications which used the term “good governance” (for
instance, Dani Rodrik). But there is also a serious question about big
vs. small government. Again, there is no doubt that to tackle the
present global financial crisis we need presently a bigger government,
including bailouts, purchases of bad debt, etc. To fight recession, we
again need, in addition to interest rate and monetary policies, fiscal
policies, to decrease the tax burden of the poorer social groups to
prop of their consumption spending, to increase government public
investment, and also, to some extent, financial aid to carefully
selected sectors. We also need proper regulation of the financial
sector, its simplification and transparency, that is, end the mistaken
practice of deregulation for good. We further need better
international cooperation to tackle the financial crisis and the
recession, and a restructuring of international organizations because
Bretton Woods organizations do not suffice to solve today’s world (as
J. Stiglitz has emphasized several times). Almost all of the above are
in line with what Keynes had proposed after the 1929-34 Great
Depression.

Today, government bailouts, etc. certainly mean a “bigger government”
than was implemented in pre-crisis USA. After the financial crisis and
recession is overcome we would need a permanent increase in government
control or regulation of the financial sector. But that should not be
evaluated as “bigger government”. Increase in controls and regulation
does, in fact, mean a bigger government, but the “bigness” caused by
financial regulation is negligible compared to public spendings,
public production vs. the private sector and the markets. Consistent
and smart macroeconomic policies, on the other hand, are indispensable
tools that has to be constantly held in the hands of the government
and Central Bank. Capitalism is not laisez-faire, it cannot be.
Neither is a socialistic system efficient. Establishing new
international organizations, or else at least coming together
internationally for joint action against international problems will,
on the other hand, restrict the “free hand” of single governments; but
they will have democratic consent for it, be it to fight a global
financial crisis and recession, or to promote health measures, solve
clean energy problems or ecology.

So, in addition to the question of smart government, there is also the
question of small vs. big government. The latter will have to change
presently compared to the past (particularly, Reagan, Thatcher and G.
W. Bush) and it will also change over the long run (that is, get
smaller) as we go to normal.