With two bills advanced through Congress in recent weeks, the Biden administration has grown the federal government’s imprint on major sectors of the US economy—including semiconductors, energy and health—and further buried the idea once widely held in Washington that private markets should be left alone, without government involvement.
The shift grew out of two decades of economic crises, rising national populism, a deepening economic rivalry with China, and concerns about the long-run effects of climate change.
Adam Smith’s invisible hand—popularized by Ronald Reagan in the 1980s and adopted by Bill Clinton in the 1990s—has been replaced by a muscular arm, in which Washington uses tax credits, tax rebates, loans, loan guarantees, regulations, tariffs, spending programs and other tools to nudge a market-driven economy that has proven far more turbulent and uneven than many people expected it to become a quarter-century ago.
Sometimes government intervention is sought when markets break down.
One risk is that efforts to tackle problems such as climate change or the threat of an emboldened China could make the economy less efficient and slow its overall growth rate, leaving households worse off than they might otherwise be in the long run. A related risk: With Washington playing an assertive role in national affairs, lobbying by deep-pocketed businesses and special interests could make the economy less fair and less dynamic.
“We are going to have bad growth,” said Douglas Holtz-Eakin, a Republican economist and former director of the Congressional Budget Office. He said the national drift away from unfettered markets has affected both political parties, including his own.
The case for small government in the 1980s and 1990s was advanced in academia by Milton Friedman, the Nobel Prize-winning University of Chicago economics professor, taken up by Ronald Reagan and the Republican Party, and eventually embraced by many middle-of-the- road Democrats, including Bill Clinton, who declared in a 1996 State of the Union address that the era of big government was over.
Three economic crises in the past quarter-century shook views about leaving markets alone—the bursting of a technology bubble in 2000, a housing crisis in 2007 and the Covid-19 shock in 2020.
The government bailed out airlines, car makers, banks and millions of small businesses with loans and emergency funding and increased oversight of banks. In the case of Covid, the Trump administration also funded a pharmaceutical industry race to develop new vaccines.
Without those interventions, the crises might have been worse; they also placed the government in the foreground of US economic affairs.
China’s rise led both parties to embrace tariffs and industrial policies to challenge a new economic rival. The CHIPS and Science Act of 2022, approved with bipartisan support in the House and Senate in July, directs $280 billion to high-tech industries, most notably semiconductors. For some Republicans, the economic threat of China warranted veering away from old, small-government orthodoxies.
“I call on Congress to pass this legislation without further delay,” Texas’s Republican Gov. Greg Abbott said before passing last month, “so that Texas and the United States can continue to lead in the semiconductor arena while decreasing our dependence on foreign production and ensuring our national security.”
SHARE YOUR THOUGHTS
To what extent should Congress guide economic priorities in the private sector? Join the conversation below.
While Republicans have embraced tariffs and an active national stance against China, Democrats are embracing the use of the tax code to advance their economic agenda. The new health and climate law, for example, includes $161 billion worth of credits for private-sector investment in non-carbon electricity sources such as solar and wind, $36 billion in credits for electric cars, and $37 billion in credits for manufacturing plants that run on green energy sources.
Economists call such credits “tax expenditures,” in that they are employed the way federal spending is used to shape economic activity.
These breaks were worth $729.5 billion in 1996, adjusted for inflation, according to the Government Accountability Office. Last year, they surpassed $1.4 trillion, and the number of individual breaks had grown from 121 to 165.
The climate bill recently passed by the senate could knock thousands of dollars off the sticker price of electric vehicles, but it’s also redefining which cars are eligible. WSJ’s George Downs breaks down the new rules and what it means for the EV industry. Illustration: George Downs
President Biden’s two new signature programs add $351 billion in tax expenditures over the next decade, according to Kent Smetters, director of the Penn Wharton Budget Model, which tracks the impact of budget decisions.
“The Biden and Trump era is one of a government that wants to play a much bigger role in what is produced, where it is produced, how it is produced and with what labor it is produced,” said Jason Furman, former chair of the White House Council of Economic Advisers under Barack Obama.
The regulatory state has grown as well. The federal government wrote 701 economically significant rules from 1981 through 2000, according to the George Washington University Regulatory Studies Center. That increased to 1,170 between 2001 and 2021. New rule-writing tumbled in Donald Trump’s first year as president to Reagan-era levels, then grew each year after that and hit an annual record in 2020, according to the center.
The public is of two minds about these shifting economic mores. Public trust in the federal government tumbled after the tech bubble burst in 2000, according to Pew Research Center. Before that bust, a majority of Americans said they trusted the federal government to do what is right always or most of the time. That dropped to 24% in 2021.
Yet a growing share of Americans say the government should do more to solve the nation’s problems. Wall Street Journal polls found that the share of Americans who believed the government should do more rose from 32% in 1995 to 57% in 2020. Pew found in 2021 that 87% of Americans believed the government should play a role in ensuring clean air and water; 64% said it should ensure health insurance for everyone and 43% said it should provide high-speed internet access.
As Washington’s sway has grown, so has the amount of money that the private sector spends to influence Washington decisions.
The sectors that have spent the most are those most heavily touched by government policies, $10.8 billion between 1998 and June 2022 by the healthcare industry, $10.2 billion by finance, $8.4 billion by communications and electronics, and $6.9 billion by the energy sector, according to OpenSecrets.org, a nonprofit that tracks lobbying spending.
During that time, overall lobbying spending increased from $1.44 billion in 1999 to $3.77 billion in 2021 and is on track to exceed $4 billion in 2022.
In his book, “The Great Reversal: How America Gave Up on Free Markets,” New York University economist Thomas Philippon said lobbying and campaign finance were at the root of important US economic problems. They led to regulations that protected big corporations, impeded the growth of startup companies, reduced consumer choice and raised prices, he concluded.
“In the twenty years following my arrival in the US in 1999, most domestic US markets lost their competitive edge,” said Mr. Philippon, a Frenchman.
Corrections & Amplifications
The federal government wrote 701 economically significant rules from 1981 through 2000 and 1,170 between 2001 and 2021, according to the George Washington University Regulatory Studies Center. An earlier version of this article incorrectly said the government wrote 26,859 in the first period and 42,187 in the second. President George W. Bush’s administration issued an average of 44.75 economically significant new regulations per year. An earlier version of a graphic accompanying this article incorrectly said the average was 63. (Corrected on Aug. 12)
Write to Jon Hilsenrath at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
.