The Return of Big Government

Pushing the limits. If we are about to see the onset of Big Government 3.0 in earnest, future economic historians might well point to the housing-spawned credit crunch as the catalyst. The Federal Reserve's recent power play—instigating the takeover of Bear Stearns by JPMorgan Chase and backing up the deal with $30 billion in loan guarantees—was unprecedented, as was its move to open up its discount borrowing window, previously limited to commercial banks, to investment banks. "It's been pretty groundbreaking," says Brian Sack of Macroeconomic Advisers, who is a former Fed economist. "The steps we've seen in recent months...have pushed well beyond the limits of what the Fed has traditionally done."

To prevent a repeat of the credit market catastrophe, Treasury Secretary Henry Paulson wants to transform the Fed into a regulatory supercop with vast oversight capabilities to ensure market stability. Expect Congress to go even further and push for new regulations on the financial industry. Too much regulation? Too bad. "Wall Street is not in a position to negotiate right now and won't be for quite some time," says economic analyst Ed Yardeni. "It's clear there will be a lot more regulation constricting Wall Street's ability to conduct the kind of financial engineering they have used over the last several years."

Indeed, some on Wall Street, the supposed bastion of belief in free-market ideology, want further Fed action. David Rosenberg, Merrill Lynch's chief economist, thinks Uncle Sam hasn't done nearly enough to bolster the housing market or return confidence to the credit markets. He would prefer that the central bank start outright purchases of troublesome mortgage-backed securities as well as to see the federal government refinance the mortgages of struggling homeowners along the lines of the New Dealesque proposals of Democrats Sen. Christopher Dodd of Connecticut and Rep. Barney Frank of Massachusetts.

At least when it comes to housing and the credit markets, Big Government sure looks like the preferred solution to many folks in market-loving America. But as a politically attractive concept or slogan, Big Government doesn't have much pizazz. Take a look at the Obama campaign. Its top economic adviser, University of Chicago economist Austan Goolsbee, is quick to punch back against any hint that Obama's proposals reveal a Big Government approach. "The issue is not that we need high taxes or big government," Goolsbee says. "That is not what the Obama campaign is putting forward. . . . That's just Republican spin and framing." Rather, Obama has pushed a far more friendly metaphor, "iPod government," to evoke a technologically advanced, transparent, and consumer-friendly image.

Goolsbee does have a point. While Obama does want to eliminate the Bush tax cuts for wealthier Americans, he's also pushing a middle-class tax cut and vows not to increase the deficit. Yet Obama has also spoken favorably of raising the income cap on payroll taxes, wants to reduce carbon emissions by 80 percent through a cap-and-trade system, proposes creating a "credit card Bill of Rights," advocates expanding the Family and Medical Leave Act, and, of course, touts a healthcare plan that would get the government involved in the sector as never before. You can argue whether this amounts to Big Government or not, but it certainly seems like more government. Indeed, both the Obama and Clinton healthcare plans are based heavily on the work of Yale University political scientist Jacob Hacker, who has argued that modern, globalized capitalism has created a need for an expanded social safety net. "People are more worried about Big Insecurity than Big Government," says Hacker, author of The Great Risk Shift. "We are at a moment that has parallels to the moment that led to the New Deal. We have an economic order that is not well placed to deal with the challenges of the 21st century, just as back then there was a realization that the world had changed but the government hadn't."