The Long-Term Damage of Bush's Statism.

The Long-Term Damage of Bush's Statism.

Bloomberg reports that a growing number of experts are now admitting that Bush's huge expansion of government will cause immense long-run damage to the economy and living standards:

The Bush administration's $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat. The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts. "We're seeing a more statist world economy," says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. "That's not good for growth in the longer run." It's not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University's Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector. … The increase in the government's role in the economy has been breathtaking. The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion. Winding back the intervention may not be easy, says Sapienza, who has studied the effect of government ownership on bank lending. When Italy nationalized banks in 1933, "the architects who designed the system envisaged it as temporary," she says. "It was in place until the end of the 1990s." … greater government involvement will make businesses less likely to deploy capital in ways that spur growth and profits, says Eric Chaney, chief economist at AXA SA in Paris and a former official at the French finance ministry. Carmakers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs. "It's the job of companies, not governments, to take risk and accept the consequences," Chaney says. "There is no incentive for governments to take risk, so they won't." … Until recently, "investors could, broadly speaking, ignore the role of the government when thinking about markets" says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. "This period is over." … "We'll end a financial crisis with a fiscal crisis," says Vito Tanzi, former director of fiscal affairs at the IMF. "We'll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so."