How did the politics of small government lead to big government bailouts?

Ronald Reagan popularized the idea of small government, which ended up being great for the top one percent of America, but has recently been shown to have some problems. This idea has influenced American politics for almost 30 years, and helped create the ineffective regulatory agencies which allowed all kinds of questionable practices to thrive in American business, especially in the world of finance. By helping create a record debt bubble, which thrived in an era of weak regulatory oversight, small government nearly ruined the global economy last fall.

However, the destructive power of small government ideology has gone unnoticed by some political leaders. To pick one, House minority leader John Boehner (R-OH) made a speech this March, in which he said that since families were suffering, "it's time for government to tighten their belts and show the American people that we 'get' it.'" As I wrote, small government is good for Boehner -- except when it comes to using taxpayer money to take five other lawmakers around the world this month on a corporate jet. That's when big government is good, for Boehner anyway.

Ironically, it is another Republican, Ben Bernanke, who decided that in the midst of a catastrophic economic collapse -- which he was way too late to acknowledge (remember "sub-prime is contained"?) -- that the prescription for the problem was the biggest government in American history. That's right folks -- we have Bernanke to thank for putting $23.7 trillion in taxpayer money at risk to rescue the financial collapse engendered by small government.

Bernanke decided that he was more loyal to his research on the Great Depression than he was to Republican political orthodoxy. And the result of all that government intervention is that most economic indicators suggest that the economy is getting worse far more slowly than it was last fall. Unless there is a double-dip-disaster -- sort of like a more virulent strain of this Spring's pig flu emerging in the fall -- there is a good chance that historians will look back on Bernanke as the man who saved the world.

How do we keep this from happening again? The most important way is to change how bankers get paid. The bubble blew up because bankers got paid their multi-million bonuses for borrowing the most money and using it make big bets. And by guaranteeing those bonuses -- whether their bets were profitable or not -- our society encouraged this unfettered risk taking.

Now that we have government debt that is nearly twice the size of the economy, we may have stopped a disaster. But all that debt is the very thing that got us into trouble in the first place. As I have posted, we need to change banker's pay so that they only get rewarded if their risks are profitable and punished if they lose money -- by using those bonuses to repay the people whose money they lost. Unfortunately, the U.S. appears to lack the political will to end guaranteed bonuses.

Furthermore, government needs far more real-time information about how business and finance is operating. This means putting an end to executives and money managers writing their own report cards and stopping the practice of banks paying ratings agencies to put the goldest wrapping paper on their boxes of financial toxic waste. As I've posted, The latter changes require setting up an independent government agency to create financial statements for companies and money managers.

All these changes will make the government a bigger part of business. But it will also unleash the forces of a real free market for innovation. Those who can invent money-making ideas that benefit society will earn enormous rewards. And those scammers who were responsible for shoving the world's economy to the brink will find something else to do.

Meanwhile, to paraphrase Bill Clinton, the era of small government is over.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. Follow petercohan on Twitter.

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