Trump’s war on the public sector: Keynes vs. laissez-faire capitalism

(René P. Rosenbaum is a Michigan State University associate professor emeritus in the School of Planning Design and Construction as well as MSU Extension. He holds a Ph.D. in economics.)

Michigan has begun to feel the impact of Elon Musk’s DOGE, which is looking to reduce the number of federal workers and shrink government spending, possibly including cuts in Social Security, Medicare, and Medicaid. The furious pace with which President Trump is implementing his policy agenda is politically understandable. He knows he is a lame duck president and that midterm elections are less than two years away.

But what is behind his war on government? Viewing recent events from a historical and ideological perspective reveals the significance and consequences of his efforts to reduce the role of the public sector in the economy.

Trump would have you believe his actions are only fulfilling his campaign promise to roll back the “administrative state,” which he now defends in the interest of reducing considerable theft, waste and inefficiencies in the federal bureaucracy. These failings in government, he claims, not only waste taxpayers’ money but also contribute to an ever growing federal debt and possible national bankruptcy.

Trump and Musk are not alone in thinking that shrinking the public sector is good for America. Their worldview is also held by conservative politicians, economists, think tanks and other business leaders who in principle embrace a laissez-faire philosophy, where the private sector is responsible for the economy. It is a view also held by the millions of Americans who have been schooled in the virtues of self-reliance and small government and believe their economic fate rests in their own hands.

Laissez-faire ideology is an American cultural trait that has long given form to the relationship between government and private enterprise, between political and economic forces. For the first 150 years of this country, for example, the economy and government were treated as two distinct spheres of human activity. In large measure, government interaction in the economy was limited to collecting taxes, mainly to pay for wars, and to erecting tariff barriers, mostly for the benefit of powerful political interests. Corporations, in essence, operated in a free market economy.

However, the government’s response to the unemployment crisis of the Great Depression brought an end to the classical laisse-faire capitalism that dominated America since its beginnings. Rather than free markets and corporations, managing the economy became federal government’s responsibility. Government involvement (in the economy) gained legitimacy with the economic theories of economist John Maynard Keynes, who considered government spending a tool to maintain full employment and stabilize the economy.  His theories validated Franklin Roosevelt’s New Deal, Lyndon Johnson’s Great Society and the idea of the welfare state.

To laissez-faire capitalists, Keynes’ faith in active government represented a deviation from the ideal of free markets. Managing economic activity and employment were not considered among the regalian duties of government. Similarly, conservative economists consistently argued that protecting workers’ rights and using monetary policy to minimize unemployment and promote economic growth were inflationary and marked a drift toward socialism.

Hence, it is not surprising that 40 years after the Great Depression, global inflation in the late 1960s and 1970s gave rise to the Thatcher-Reagan revolution, a movement that sought to demonize government, mock regulations, challenge unions and treat public administration with contempt. Leaning on the ideas of Milton Friedman, the Reagan administration championed an exclusive focus on inflation.

One thing that the Reagan and Trump administrations have in common is the laissez-faire belief that management of the economy is a private sector matter. Hence making sense of Trump’s cuts in government is about much more than addressing government waste, fraud and abuse. Rolling back the state is about who stakes the right to manage the economy, corporations or the government. In that regard, two points are worth considering: Society has embraced government responsibilities to manage economic activity and unemployment since the 1930s; and leaving managing the economy to corporations and the free market will only mean a return to the exorbitant economic and financial volatility of the classical laissez-faire era.