Essay: Government Failure

Government Failure by Sheldon Richman

Pundits and politicians are virtually unanimous in saying today’s economic turmoil is the result of a laissez-faire policy in Washington and an orgy of greed and irresponsibility on Wall Street. Some samples:

John McCain: “We are going to fight the greed and irresponsibility on Wall Street. These actions [leading to the crisis] stem from failed regulation, reckless management, and a casino culture on Wall Street....We need strong and effective regulation, a return to job-creating growth and a restoration of ethics and the social contract between businesses and America.”

Barack Obama: “[The economic problems are] a stark reminder of the failures of crony capitalism and an economic philosophy that sees any regulation at all as unwise and unnecessary.”

New York Times: “The regulatory failure is rooted in a markets-are-good-government-is-bad ideology....”

What about irresponsibility? Now we are getting to the crux of the matter. There was irresponsibility -- but only because the government for decades has pursued a policy of relieving big companies of the responsibility that otherwise would have been imposed by market discipline and competition. That’s a good way of summing up the government’s approach regardless of which party was in power: the weakening of market discipline. Any promise -- explicit or implicit -- to bail out companies and any regulatory, tax, or trade policy that raising the barriers to entry for new competitors weakens market discipline and invites -- yes, invites -- recklessness.

The point isn’t greed and irresponsibility; it’s incentives. In a truly free market -- when business people know they will suffer the consequences when they do stupid things -- “greed” (whatever that may be) tends to create general benefits. (“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”) In a government-regulated and government-guaranteed environment, “greed” can inflict harm on innocents, such as the taxpayers or consumers via inflation. Institutions determine whether self-serving action benefits or damages others. Institutions that respect freedom, property, and self-responsibility promote the general welfare. Institutions that forcibly transfer wealth, punish responsibility, and reward irresponsibility promote social and economic catastrophe.

The complexity of financial markets is beyond the comprehension of mere mortals. Trying to make these markets safe through government management is as sensible as waving a magic wand while chanting “abracadabra.”

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