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The Biggest Engine of Economic Growth? 8 Ways Taxpayers and the Government Are Necessary to Capitalism

Almost everything the American capitalist system needs is provided by taxpayer dollars and government action.
 
 
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Dating back to Ronald Reagan, and even before, conservatives have constantly attacked government. The drumbeat repeats the notion that the private sector can do everything better. “Privatize everything" is the mantra. It’s hard to imagine anything more destructive to our economy. 

This presidential season, GOP candidates have revved up the maligning of government, and even liberals and Democrats join in the chorus, spreading the big lie that government is too big, corrupt and wasteful without understanding just what government provides the economy and society. 

A big part of the message is that the private sector is responsible for the progress and innovation that drive economic growth. Conservatives crow that private venture capital is what makes America great. Mega-millionaire Mitt Romney is the loudest on this point  -- a man who made his money at Bain Capital, a venture operation known for buying companies, laying off workers and selling them off for big profits. 

Yet the persistent view that the private sector is chiefly responsible for economic growth is false. Those who claim the superiority of private capital and insist that government is not effective as an inventor or venture capitalist should consider the history of the jet engine and the computer, to name just two inventions have been essential to progress and technology growth. They were both developed with public money. The Internet, too, was invented in a government laboratory in the late '60s , and its early applications were heavily underwritten by the federal government.

Private Sector Corruption

We’ve all had our frustrating experiences with the government, from the local DMV to the IRS. But what about the aggravation and heartaches caused by many private sector operations? Are you really satisfied with cable TV, telephone companies, banks and the credit card industry? In their zeal to squeeze every cent from their customers, they seem to want to drive us insane. Where the private sector meets bureaucracy, there is waste and tons of corruption.   

For example, recently JPMorgan Chase, whose CEO Jamie Dimon is both a media darling and for a while President Obama's favorite banker, agreed to pay $110 million to settle a class-action suit for gouging its customers on overdraft transactions. JPMorgan Chase, like many banks, artificially re-ordered transactions to clear from highest to lowest in order to trigger many more overdrafts payments, basically cheating customers. To the public (those who heard about the settlement), $110 million seems like a lot of money. But it is only a lot if it cut greatly into the profits that were made with the overdraft bonanza.  

Fortunately, journalist Jeff Horwitz of American Banker discovered that the bank generated $500 million a year in post-tax income from high-to-low re-sequencing, according to Chase’s own analysis. Thus, Chase’s settlement is very favorable to the bank, given that the $110 million offered is just 22 percent of its alleged earnings from wrongful overdraft fees. As the Huffington Post adds: “When compared with the billions of dollars big banks have rung up in overdraft fees over the last decade, recent settlements with customers over unfair overdraft charges have amounted to little more than a slap on the wrist."  

Now imagine the uproar from conservatives if the government had perpetrated this kind of fraud on U.S citizens. But do we hear calls for the end of private enterprise because of corruption and waste? Hardly.

Though we pay obeisance to the late Steve Jobs for the iPhone, researchers Michael Shellenberger and Ted Nordhaus have noted that all of its core technologies, from the microchips to GPS to the voice-control application, Siri, depended on years of Department of Defense funding. In fact, the U.S. government has been the key engine of economic growth since the earliest days of the Republic— and it is now, but very few people realize that. Why? Because we don't explain how government spending is woven into much of corporate success. We don’t counter that the government is constantly in an active, co-venture model with the for-profit sector in providing vast elements of infrastructure and directly creating technologies that the economy is dependent on, and corporations profit from.

In addition to the constant propaganda attacking government, there is even research trying to claim that public funding of innovation has not been a key source of revenue and growth. But those studies are off for one major reason: they don't look back far enough to where the innovations were funded.

In the San Francisco Chronicle Magazine, Shellenberger and Nordhaus lay out the most obvious examples of the government priming the pump of innovation. They remind us that the Air Force, and later NASA in the 1950s and 1960s, contracted with companies to make microchips — and loaned them money to build factories. It wasn’t until the ‘80s that personal computers took off, and increases in labor productivity didn’t translate into economic growth until the ‘90s. But it accounted for much of the post-1990s economic boom.

Another myth of the market capitalism narrative is that innovation comes out of market competition. But that notion, too, is tossed on its head. As Schellenberger and Nordhaus write, "Today's relatively inexpensive jet travel began with Pentagon procurement and R&D for jet turbines in the 1940s and '50s. But it took many decades before jet travel became accessible to the average American, and much of the rest of the world.”

Most everything the American capitalist system needs is provided by taxpayer dollars and government action. Here are eight examples. 

1. Public Trust and Economic Infrastructure

The economic system would not function without the overall infrastructure that allows commerce to operate, including guaranteeing sovereign credit worthiness and currency protection. The economy also depends on the system of law and order that enforces contracts, copyright and trade agreements. 

2. Education and Social Knowledge

Public schools, public universities, not-for-profit institutions of learning and research are all paid via government grants, tax exemptions and general tax revenues. Enormous amounts of government funds go to research in private universities, which then move out to private industries via technological innovation and production. This happens with food technology, drug development, medical discoveries and health solutions. In the 19th century, Land Grant colleges and farm extension programs built U.S. agriculture. The National Defense and Education Act (1958) put science in our schools and seeded generations of technology innovators and skilled workers.

3. Relief in Crisis, Catastrophe, or Everyday Life 

How do we spell relief? Try government. The human and social costs of economic and technological growth are borne by government— from unemployment insurance to emergency room hospital care for individuals. From food stamps and income tax credits to disaster relief and community development investment. Order and stability are maintained by the relief triggers pioneered by Bismark in the 19th century and Roosevelt in the 20th which were advanced in order “to save capitalism from itself.”

At the same time, social programs like Medicare, Medicaid and food stamps send government dollars to small businesses and retail and service providers across the country. Critics of the Affordable Health Care Act worry some about another open-ended entitlement. It is worth noting that the “open end” is at least as much about no price controls on drugs companies, cost of equipment by manufactures and hospitals, and the continued pressure for private insurance profits as it is about uncontrolled demand for service.

4. Regulation and the Public Good

The government protects food, air and water for the public good. It also shapes the successful operations of commerce via global trade agreements, tort and trust law, land use (which has long favored large property owners) builders and agricultural enterprises. New York City’s skyline of skyscrapers, including the World Trade Center, was created and recreated in the 1930s and the 1960s primarily through government spending. Rockefeller Center is most noteworthy as the first large Manhattan large-scale project to be entirely funded by private capital— but still with tax subsidies. In a parallel fashion, agricultural land-use, pesticides, farm loans and tax benefits have built agri-business’s monopoly on US food production.  

5.  Massive Purchasing That Supports Businesses

Massive amounts of military and government purchasing account for a significant component of large and small business in production and service sectors. This happens at all levels -- from federal to local, from schools to fire departments. For example, Starbucks is a significant recipient of military contracts. Such purchasing is the very essence of "pork barrel" economy.

6.  The Infrastructure in Which Everything Operates

At least since Alexander Hamilton’s plan for the Erie Canal, government has been key to the creation of national infrastructure. This is true for rail, road, sea and air travel. National electric power, too, is the result of government’s role via coal and gas subsidies, dam design and construction. Through such investment, government actually created commercial markets that didn’t otherwise exist. This huge order of spending virtually built whole states (e.g. Texas) where public investment and planning triggered modern growth. 

7. The Labor Pool: Preparing Employees for the Private Sector

Labor rules are designed for the generation of an effective workforce. So are laws enacted to directly shape the character and timing of workforce availability. The GI Bill following WWII and including both Korea and Vietnam wars re-integrated some 3-4 million workers into the economy. Through subsidized university tuition payments and mortgages, both the real estate and higher education sectors grew exponentially as part of the socio-economy. Similarly, through both foreign and domestic trade policies: e.g. NAFTA, immigration law and foreign aid, government expenditures all directly impact private sector annual and seasonal labor flow, capital markets, and profits. 

8.  Stimulus for Just About Everything

Government provides stimulus to for-profit enterprise via tax codes, tax subsidies exemptions and the application and/or release of fiscal and monetary controls. Government loan guarantees for deposit bank accounts are central to American fiscal health; the FDIC insurance program has freed banks to invest with the public as the creditor of last result. Currently, tax abatements are used to entice business and to attract it to particular locations. The film industry receives major abatements for bringing filmmaking to particular states. In some instances, the value of this allowance reaches 42 percent of the overall production costs of a movie. The rationale for these tax credits is that jobs will be developed locally.

9. Direct Investment in the Creation of Key Innovations 

This is perhaps the most unseen of government’s functions. As a silent partner, government brought massive capital investment to the advancement of technological research and development with no return on investment beyond tax revenue growth to capture it. Phone, radio, TV, computers, the satellite system, nylon (invented in place of silk as war with Japan loomed), Velcro, and breakthrough drugs were all the result of intense public investment in university and corporate research and development.

R +D is a key aspect from this sphere of activity. Most recently and quite typical is the long-term government investment in drilling technologies, 3-D imagining and geological mapping. All have now been given over to the private profit through fracking to produce natural gas.   

So government, then and now, serves as a venture capitalist. But the government does not get a return on investment or equity stake—the very conditions Warren Buffet required for his “bail out” investment in Goldman Sachs. (TARP is actually the first government investment to return any interest on investment at all; but of course, with no equity stake.) Further, public debt itself, while a mind-boggling size, actually adds enormous profit to the lenders— many of whom also benefit in the current crisis climate from Federal Reserve no interest loans, which were used for relending at a profit. 

10.  The New Phase of Social Welfare Financial Transfers

This is the newest area of commercial profit-taking from government investment. It results from the recognition that the goods and services that are provided by the public sector are an area of enormous spending that can generate great returns for private providers. That’s why we see robust campaigns for private school vouchers, for-profit charter schools, and pecuniary on-line learning through all the grades. Despite the rhetoric that disdains public services, the “social welfare services” established over several decades for public benefit are being transferred to private enterprise. Notwithstanding claims to the contrary, this form of profit-based delivery is not less costly, nor more effective. But it is highly profitable. On both the criteria of effectiveness and profit, witness the current expenditures and results in prisons and in privatized schools and collegiate education.

In this same vein, the new national health care individual mandate is a direct partnership with private insurers that will inure to their great profit. Furthermore, the Republican idea of privatizing Social Security and Medicare would be a boon to the denizens of private wealth creation. Boom and bust cycles will likely massacre the pensions of retired workers, but they will barely dent the long term profitability of investment houses.  

The demise of an industrial and manufacturing economy in the U.S. and the periodic declining rate of profit has made public capital a target treasure trove for corporations— which can now take “welfare” as the “persons” the Supreme Court in their egregious decision in Citizens United declared them to be.

Conclusion

The view that the private sector is the independent engine of economic growth is obviously false. It’s time for an articulated economic framework which describes how the modern state has worked in an active co-venture with the for-profit sector.

Who knows what kind of tax system on debt position the nation would be in if we had created  a venture capital bank that explicitly shared in commercial revenues as all venture capitalists do? Put another way, what would a public finance system look like if the public shared the private profit and personal wealth that was made with the help of our money?

Elizabeth Warren has clarified how the social web and the physical infrastructure that government supports is essential to market function, growth and wealth creation.  It makes sense to go a step further and clarify how government action and public dollars serve as a direct partner with the private sector in advancing growth and wealth. Then, it would not be so easy to take the money and run. 

Colin Greer is president of the New World Foundation in New York. Among his books is A Call to Character (HarperCollins, 1995).