Is it time to be optimistic? Why I think so, despite government interference in growth

We can put 2020 behind us and look forward to the year ahead, but can we be optimistic?

As economists often do, I am going to say yes on the one hand and no on the other.

On the positive side, there’s a COVID-19 vaccine that gives us good reason to expect economic activity will return to normal this year. In a recent survey, business economists forecast 3.7% real economic growth in 2021, compared with a decline of 2.5% last year, and well above the long-run growth rate in our economy of 2% per year.

Moreover, a higher-than-normal growth rate this year could carry over, because worker productivity is rising. The U.S. Bureau of Labor Statistics reports that output per hour is growing at more than 4% annually.

It seems as if individuals and corporations have found new and innovative ways to get things done. New ways of delivering services. New ways to collaborate, no matter the distance. It’s a fundamental principle of economics that such innovation and higher productivity is the key to long-term economic growth.

On the negative side, there is a significant rise in government intervention. The current crisis has led to a large increase in government spending and an expansion of government oversight and regulation.

Decades ago, economist Robert Higgs documented the relationship between crises and growth in government. He showed that once a crisis ends, many of the government-imposed restrictions recede, but the level of government intervention does not fall back to previous levels.

More recently, political scientist James Payne of Sandpoint, Idaho, described the puzzling habit Americans have of seeking government solutions to problems while at the same time complaining of how ineffective the government is at solving problems. In his new book, “The Big Government We Love to Hate,” Payne shows the folly of this position, which is supported by the empirical research that government interventions lead to slower economic growth over time.

I’m going to stay optimistic, just as the father of modern economics, Adam Smith, did in his day. He wrote, “But though the profusion of government must, undoubtedly, have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it.”

May it be so today!

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu

This story was originally published January 21, 2021 at 4:00 AM.