Government Stimulus

Sheldon Richman writes:

As George Mason University economist Russ Roberts says, government’s stimulus of an economy is equivalent to taking water from the deep end of a pool and pouring it into the shallow end. Thus, all talk of stimulus is nonsense. Both Democrats and Republicans have bought into this Keynesian nonsense, even if they wish to implement it in somewhat different ways...

So, then, how does an economy recover? It doesn’t recover through central-bank policies aimed at keeping interest rates low, discouraging saving, or fiscal policies aimed at boosting consumption, including the government’s own consumption of resources. It doesn’t recover through reinflation of burst bubbles. Recessions (low to negative growth, unemployment, idle resources) follow booms and bubbles, which are caused by central-banking polices that fill the economy with cheap credit and regulatory programs that channel the credit into particular areas, such as the constellation of easy home-purchase policies carried out by several government agencies for years. The booms set off by those policies are characterized by a misshapen capital structure; that is, resources and labor were arranged according to price signals distorted by the central bank and other government agencies. For example, labor and equipment went into the housing and housing-finance industries to a vaster extent than they would have gone absent those price-distorting policies.

When interest rates finally rise to reflect reality, the boom ends, revealing the unsustainable nature of the misshapen capital structure. Businesses close, workers are laid off, and capital is left idle. The effect ripples beyond the immediately affected industries. If government were to retrench at that point, entrepreneurs would set out on the task of re-arranging resources and labor in order to align them with entrepreneurial estimates of future consumer preferences.

This rearrangement is neither costless nor instantaneous. Equipment made for one purpose may be unsuitable for other purposes and may have only scrap value, or it may be in the wrong location. Likewise, people trained to build houses or to work with financial computer models may not be qualified for other jobs and will need retraining. The work of changing the structure of production from its politically distorted shape to one that will better serve consumers requires money. There’s only one place that money can come from if the economy is not to be further distorted: savings. But saving is consumption deferred. Thus all government efforts to stimulate spending and discourage saving accomplish the opposite of what is required for economic recovery.

Free people create economic growth when government backs off — slashes spending and taxes, ends regulations and privileges — and lets them correct the mistakes induced by earlier monetary and regulatory stimuli. Nothing less will work lastingly.

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Sheldon Richman on Social Cooperation

Richman writes:

It is through cooperation and the division of labor that we all can live better lives. Naturally, he laid great stress on the need for peace. The absence of peace is the breakdown of that vital cooperation. This put Mises squarely in the pacifistic
classical-liberal tradition as exemplified by Richard Cobden, John Bright, Frédéric Bastiat, Herbert Spencer, and William Graham Sumner. Mises writes
in Liberalism:

The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians. It starts from the premise that not war, but peace, is the father of all things. What alone enables mankind to advance and distinguishes man from the animals is social cooperation. It is labor alone that is productive: it creates wealth and therewith lays the outward foundations for the inward flowering of man. War only destroys; it cannot create. War, carnage, destruction, and devastation we have in common with the predatory beasts of the jungle; constructive labor is our distinctively human characteristic. The liberal abhors war, not, like the humanitarian, in spite of the fact that it has beneficial consequences, but because it has only harmful ones...

We’re all grappling with an uncertain future. Social cooperation unquestionably makes that task easier than if we attempted to go it alone. That’s why individuals formed mutual-aid (fraternal) organizations. Besides camaraderie, these groups provided what the welfare state feebly and coercively provides today: islands of relative security in a sea of uncertainty.

If people support the welfare state, don’t be puzzled. It’s because they cannot see a better voluntarist alternative. That’s where libertarians come in.

We libertarians might have an easier time persuading others if we emphasized that freedom produces ever-more innovative ways to cooperate for mutual benefit and that when government dominates life, social cooperation is imperiled.

read the entire essay

War Does Not Produce Prosperity

Sheldon Richman writes:

Many bad ideas go under the rubric “Keynesian economics,” but perhaps the worst is that government spending — no matter what kind — can genuinely stimulate of an economy and increase the general welfare.

To see how ridiculous this idea is, have a look at what the leading Progressive Keynesian, Paul Krugman, and leading conservative Keynesian, Martin Feldstein, agree on: a big war is apparently the only way left to get the U.S. economy out of its doldrums. The National Journal reports that at a recent economic forum, Krugman and Feldstein agreed that Washington is too paralyzed to sufficiently stimulate the economy. “Only a high-impact ‘exogenous’ shock like a major war — something similar to what Krugman called the ‘coordinated fiscal expansion known as World War II’ — would be enough to break the cycle,” the report stated.

”I don’t think we’re about to launch a war against anybody,” Feldstein responded. “But Paul is right. That was the fiscal move that got us out” of the Great Depression.

Here is Keynesian economics taken to its logical end: government spending is so essential to restarting a stalled economy that a major war — with all its death and destruction — may be the only way to achieve the stimulation needed. It may go too far to say that Krugman and Feldstein would relish a war, but only by a little. They clearly believe that in the current circumstances, war is our only hope.

There is a superficial logic here. If you believe government spending stimulates an economy, then why not war? In a big war government taxes and borrows huge amounts of money in order to buy large quantities of things — airplanes, tanks, Humvees, bombs, guns, bullets, supplies, clothing, food. It also pays lots of people — bureaucrats, soldiers, sailors, pilots, engineers, manufacturing workers — to do things. In turn the recipients spend that money on the necessities of life. Hence, the jumpstart to the economy.

But of course war means death, injury, and destruction. How can making things that will be used to destroy other things, including lives, produce economic well-being? Are we really ready to accept the Orwellian notion that war is prosperity?

If we have reached the point of seeing war as a source of good things, it is time to check our premises. Right away we see that if the government pays people money to make war materiel, private entrepreneurs can’t pay them to make things consumers will want to buy. This is the “broken window” fallacy: being so distracted by the visible “benefits” of a government policy that one overlooks the unseen costs. Government doesn’t create resources; it only moves them around. When government taxes or borrows, it transfers scarce resources and labor from the productive sector to politicians and bureaucrats. The Keynesian will say that since the resources are idle, there is no cost and only benefits from the transfer. That is a shallow response.

Resources may well be idle, but there’s a reason for that. A recession follows a government-produced inflationary boom that misallocates resources by artificially lowering the interest rate. The misled entrepreneurs thus put resources in the wrong places and commit them to the wrong purposes relative to consumer preferences. When the boom ends and the recession sets in, the errors reveal themselves and have to be corrected. That takes time, but government delays the recovery by interfering and by poisoning the investment climate with uncertainty. Who will commit to a long-term project while unsure what tax or regulatory policy might be next month or next year?

As for World War II’s ending the Great Depression: nonsense. The Depression was bad because living standards fell when, because of the previous inflationary boom, production didn’t match consumer preferences. Business projects were liquidated, creating high unemployment, and government interference and uncertainty impeded recovery. The war did not restore living standards — consumer goods were rationed — and unemployment ended only because of conscription. Improved statistical aggregates for national income or investment only concealed what was really going on. What ended the Depression was not government spending but the retrenchment of government after the war.

So thank goodness we don’t need a war to prosper. Shame on those who say we do.

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Sheldon Richman on Dodd-Frank Financial Legislation

President Obama has signed the financial industry regulatory overhaul – officially, the Dodd-Frank Wall Street Reform and Consumer Protection Act. Predictably, what he said about it cannot possibly be true.

For example: “[T]hese reforms represent the strongest consumer financial protections in history. And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – looking out for people as they interact with the financial system.”

And: “[B]ecause of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more tax-funded bailouts — period. If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so we don’t have another AIG.”

Note that Obama did not promise to spare the taxpayers from having to foot the bill for the government’s mistakes. He and the members in Congress know better than to make that howler of a promise. Nevertheless, the magnitude of the whoppers being told about this law is astounding.

The government cannot deliver on pledges to protect consumers in the financial markets and to shield taxpayers from bailouts. In the first instance — consumer protection — financial instruments are inherently complex and government attempts to shelter less-sophisticated investors and borrowers from all danger would either require control of products to the point of prohibiting things people want or inundating them with information until they ignore all of it because of the sheer volume. Alas, what the new law will provide consumers is a false sense security – and that’s worse than none at all...

Most generally, the new law exhibits the standard governmental hubris. Who truly believes that an army of necessarily myopic bureaucrats can ever know enough to 1) anticipate a systemic crisis and 2) do something intelligent about it in a timely way? The more centralized the power the more vulnerable we average taxpayers are. Mistakes are system-wide. The virtue of a freed market is not that it’s unregulated (it’s not) but that its radically decentralized...

It’s Dodd, by the way, who said of his bill, “No one will know until this is actually in place how it works.” And Frank is ready to submit new legislation to fix any mistakes in the law. We’re about to have a laboratory experiment of the law of unintended consequences.

Obama said: “For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy.” The implication is now we have up-to-date rules that will be vigorously enforced. But he can’t possibly know that. Why not? Because in writing the law, Congress did not write the rules. It merely handed that job off to unelected, unaccountable bureaucrats in a variety of agencies.

read the entire essay

Capitalism v The Free Market

Economic Liberty Lecture Series: Sheldon Richman from The Future of Freedom Foundation on Vimeo.

Bryan Caplan responds:

If Sheldon were merely saying that libertarians' noun of choice should be "the free market," rather than "capitalism," he'd have a decent case. But for libertarians to reject "capitalism" as an alternate noun is overly defensive - and to announce that we "oppose capitalism" is completely confusing.

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Stephan Kinsella responds:

I have myself for years now preferred the term anarcho-libertarian instead of anarcho-capitalist, mostly because libertarianism is about more than just free markets. But to the extent capitalism means the private ownership of the means of production–and I think this is a defensible meaning still–it is of course libertarian. We can expect any advanced libertarian society to be “capitalist” in that it would have an industrial, productive economy where the means of production is privately owned, characterized by the division and specialization of labor.

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Sheldon Richman on Health Care Reform

If the politicians who are bent on redesigning the medical and medical-insurance industries really wanted only to curb rising prices and help the uninsured get coverage, they would have zeroed in on the previous government interventions that created those problems. Instead, they are pushing grand schemes to turn our medical decision-making over to bureaucrats. That indicates that the so-called reform campaign is about power.

Medical care is too expensive. Prices for services rise faster than other prices, and there’s reason to believe much of the money is wasted. Expensive medical care equates to expensive insurance, which prices some people out of the market.

This has been called a failure of the free market, but that can’t be: There is no free market. I defy the advocates of government control to name one aspect of medicine or insurance that government doesn’t dominate...

Yes, we suffer from monopoly and high prices. Government is the reason.

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The Right to Medical Care

The idea of a right to medical care is so blithely tossed around that most people never take time to ponder the rather serious consequences that would flow from it. It is a classic pseudo-right. A pseudo-right is any claim expressed in rights language that would expand the power of the state at the expense of genuine rights...

Let’s start with something basic: for a right to be genuine, it has to be capable of being exercised without anyone’s affirmative cooperation. The full exercise of my right of self-ownership requires you to do nothing except refrain from killing or assaulting me. The full exercise of my property rights requires you to do nothing except refrain from taking what is mine. You have no positive, enforceable obligations to me, apart from any you accept through contract...

Here is the crux of the issue. The right to medical care must mean—no exceptions—the power of government, in principle, to determine who gets what. It may not exercise that power immediately. But given the economics of the matter, it will, sooner or later. I submit that this has nothing to do with rights and everything to do with control, literally, of people’s lives...

read the entire essay

Richman on Heath Care Collectivism

We have to do something about health care.”

The scariest word in that sentence is not something. It’s we...

It indicates that decisions about “the healthcare system” are to be made collectively, with one decision binding everyone.

That’s collectivism...

But why must we do anything about health care? Why can’t you do what you want, I do what I want, and he and she do what they want? Isn’t that what’s supposed to happen in a free society?...

With each so-called reform, we (in reality, they, the politicians) made things worse. It’s time we — collectively — stopped trying to reinvent the medical and insurance industries. Instead that task should be left to us individually — acting, transacting, competing, and cooperating in the marketplace. Only then will solutions emerge from people’s — not politicians’ — choices, as entrepreneurs (neither aided nor impeded by the State) pursue profit by producing goods and services that make us better off...

Let’s hear no more about what we — collectively and coercively — must do about health care. If government would get out of the way we — individually and cooperatively — would figure out what to do. Collectivism and government planning trample freedom and foster social stupidity. Individualism and free markets respect each person’s dignity and liberty while getting the most out of the “wisdom of crowds” in the marketplace.

read the entire essay

Sheldon Richman on Health Care Reform

The effort to reinvent medical care is so full of fallacies and bad logic that it would take volumes to properly expose them. Nevertheless, in this short space, let’s take a crack atsome of the problems.

To begin, the “reformers” want to compel insurers to cover people who are already sick for the same price healthy people pay. But if someone is already sick, no government plan to pay his medical bills can be accurately called “insurance.” Insurance is a voluntary way to spread risk. Risk comes from uncertainty. But someone already sick doesn’t face a risk that he might need medical attention for his ailment. He is certain to require the attention. There’s a reason you can’t buy homeowner’s insurance after your house has burned down or life insurance for a deceased person. Why should one expect to be able to buy insurance to cover medical treatment for a disease one already has contracted? When private donors voluntarily pay the bills, we call it charity or philanthropy or benevolence. When government pays them after extracting money by force from taxpayers or by requiring insurance companies to overcharge healthy people who are compelled to buy coverage, we should call it (at the very least) welfare.

If someone wants to defend medical welfare, let him do so. But don’t let him get away with calling it insurance. He not only does violence to the language; he also clouds the discussion. This is another application of the tacit premise that no one should have to pay for his own medical care. Bastiat’s line about the state being the means by which we all try to live at everyone else’s expense comes to mind...

Finally, the way to rig a debate over public policy is to never acknowledge the only genuine alternative to your proposal. Obama says, “I’m confident that when people look at the costs of doing nothing they’re going to say, we can make this happen.” Why is “doing nothing” the alternative to a conscious attempt to reinvent the healthcare industry? While it is true that doing nothing would be preferable to what Obama and his congressional allies want to do, it is not the best alternative. The best alternative is the free market. But have you ever heard the advocates of government control offer an argument against the free market? The answer is no, and the reason is that to argue against it would be to acknowledge it as an alternative. And that they cannot afford to do. Better to have the people think we already have a free market in medicine and that it has failed. That way they will be more likely to win support for government control. The “reformers’” task would be more difficult if people understood that what has created the problems is government, not the free market.

read the essay

Sheldon Richman: Less Than Nothing

The story is told that Ludwig von Mises was once asked, “Do you mean to say that the government should have done nothing during the Great Depression?” Mises responded, “I mean to say it should have started doing nothing long before that.”

I hope the story is not apocryphal, because it perfectly sums up the government’s proper role in managing the economy: none...

Of course, politicians are incapable of doing nothing when there is harm to be done, but the “stimulus” critics intrepidly insist that anything the government does will be worse than doing nothing at all.

This is certainly true. Unquestionably, doing nothing is better than borrowing nearly $800 billion from the credit markets (to be repaid through inflation and taxation) and spending it on pet political projects, from food stamps to bridge repairs to subsidies for favored energy forms...

If government really wants to make it easier for people to own homes, let it give up control of money and banking, divest itself of the land it holds off the market, and generally relieve society of its endless burdens.

The biggest favor the state can do for us is to stop doing us favors!

read the entire essay

My thoughts: Corrections are necessary after booms. Trying to avoid the pain of a correction only makes things worse.

Budget Deficits and Stimulus

It’s an article of faith that running budget deficits during the New Deal helped end the Great Depression. This myth has been demolished countless times, but it hasn’t penetrated to the pundits and pop economists who host cable news-talk shows. In fact, FDR did not run extraordinarily large budget deficits, and J.M. Keynes actually criticized FDR for this. For details see this New York Times article by Price V. Fishback of the University of Arizona and the National Bureau of Economic Research. Fishback writes, “Once we take into account the taxation during the 1930’s, we can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem [reversing the fall in GNP since 1929].

This point was also made by Jim Powell in FDR’s Folly: “Changes in federal budget deficits didn’t correspond with changes in gross domestic product, and in any case the federal budget deficit at its peak (1936) was only 4.4 percent of the gross domestic product, much too small for a likely cure.” (Emphasis added.)

P.S.: Of course, this does not mean that FDR should have run deficits to end the depression. It woudn’t have worked because government borrowing doesn’t add wealth to an economy; it just moves it around. (See Bastiat.) And inflation steals purchasing power and distorts the structure of production. Both measures put politicians rather than consumers in the driver’s seat.

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Sheldon Richman on the Bailout and Compromise

As the misnamed “stimulus” bill works its way through Congress, we once again see compromise equated with responsibility. The political “leadership” and establishment media seemed to have a vested interest in portraying anyone who refuses to compromise as recklessly unconcerned with the well-being of the country.

The problem with this outlook is that basic principles can’t be compromised...

If you know nothing about economics, you may see this as something to compromise about. Perhaps the total cost could be lowered or some of the program modified. Unfortunately, this is the official Republican position.

But that wouldn’t be a compromise. That would be a capitulation to folly. You need to know some economics to understand this.

The word “stimulus” is a propaganda word. It doesn’t describe the bill. Rather, it lies about what will really happen in order to make it more palatable to the electorate...

The only real solution is to let the market reallocate resources in harmony with the economic reality those policies have masked for years. That requires saving and investment, not consumption. It also requires abstaining from what the government seems intent on doing: re-expanding the very industries that are badly in need of contracting.

So the “stimulus” bill is anything but that. It is a highly destructive piece of legislation that should never have seen the light of day. For those who realize this, no compromise was possible.

read the entire essay

Government Stimulus or Boondoggle

Even if government spending in theory could “stimulate the economy” in a genuine, sustainable way, it would not follow that politicians and bureaucrats would know how to spend the money intelligently. The pressures to do something now and the perverse incentives facing those in charge of the money guarantee there would be more doggle than boon...

The government isn’t starved for tax money. It’s just lousy at spending it intelligently. “Spending is up 50 percent over the last 10 years, after adjusting for inflation. As a share of the economy, it will be higher this year than in any year since 1981,” Leonhardt writes...

Government will be government. As Russell Roberts says, expecting a stimulus bill not to have pork is like expecting a ham sandwich not to have pork...

Government borrowing and inflation is exactly what we don’t need. No politician, however charismatic, is capable of creating wealth by creating money.

Is there a role for the politicians? By all means. They must radically reduce the burden of government at all levels and in all ways. This includes spending, taxing, borrowing, regulating, subsidizing, and inflating.. An economy cannot serve consumers if politicians, pretending to know what they are doing, insist on interfering.

read the entire essay

My thoughts: Richman shows once again why he is of the best economic commentators today. Central planning does not work.

Weisberg v Richman: On the Financial Crisis

A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argumentAnother theory blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue. casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy.

There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along...

There's enough blame to go around, but this wasn't just a collective failure. Three officials, more than any others, have been responsible for preventing effective regulatory action over a period of years: Alan Greenspan, the oracular former Fed chairman; Phil Gramm, the heartless former chairman of the Senate banking committee; and Christopher Cox, the unapologetic chairman of the Securities and Exchange Commission. Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren't covered by the Commodity Futures Modernization Act, a bill he shepherded through Congress in 2000. Blame Cox for championing Bush's policy of "voluntary" regulation of investment banks at the SEC.

read the entire essay


According to Weisberg, editor in chief of Slate, the financial turmoil taking place worldwide is the fault of . . . libertarians. That must mean libertarians have been in a position to repeal generations of deep-seated government intervention in the financial and related industries, including the Federal Reserve system. That would have taken a long time, yet I don't recall reading that a libertarian revolution occurred in the United States. Surely it would have been in the newspapers. Hence, I must conclude that I, like old Rip, was slumbering all those years. I missed the revolution! It's the only possible explanation.

Unless Weisberg is wrong...

But did self-regulating financial markets exist and hence fail? It begs the question to assume this was the case. Weisberg has to prove it. He does not even try...

Weisberg makes the same mistake that superficial free-market advocates make. He believes that markets, to qualify as free in libertarian theory, need only be free of government restrictions (regulation). But that is only half the story. Truly free markets are also free of privilege -- guarantees, bailouts, Fed-provided liquidity, taxpayers as lenders of last resort, and so on. If you have unregulated markets but privileged, too-big-to-fail institutions, you do not have free markets. A market without full market discipline (the threat of losses and bankruptcy) is a contradiction in terms. So much for Cox's "voluntary regulation." No guarantees were withdrawn from the firms that were expected to regulate themselves. That's phony free-market-ism...

Weisberg is not the only writer who has declared the free market and libertarianism dead in the wake of the subprime collapse. One sees a certain desperation in such declarations -- as though those issuing them fear that people might start realizing that today's economic turmoil is not a market failure but a government failure.

read the entire essay

Sheldon Richman: Capitalism or Freedom

Capitalism or Freedom
October 17, 2008
Sheldon Richman

"These measures are not intended to take over the free market, but to preserve it," George W. Bush said in Orwellian tones Tuesday as he announced the partial nationalization of nine major American banks.

He was partly right, though not in the way he meant his words. There is no free financial market to take over. But that means there is no free market to preserve either. The moves he announced, which include government part-ownership of smaller banks too, were just more, albeit big, steps along the corporatist route the country has been following for generations...

There's an unfortunate phenomenon in politics. If a candidate says he favors markets but does little to actually free any markets once he becomes, say, president, lots of people will assume he's done so anyway. Evidence that he didn't won't matter. He will become known for his "laissez-faire, hate-the-government" policies -- even if such policies are nonexistent. Rhetoric gets all the attention.

But there's an asymmetry here. As noted, the most important deregulation of the last 30 years occurred, or at least was set in motion, by Jimmy Carter (trucking, airlines, banking, oil prices, telecommunications, and more) and Bill Clinton (banking). But no one accuses them of devotion to laissez faire. Yet Republicans who initiate little or nothing in this regard -- or worse, sponsor intervention such as protectionism -- are portrayed as Adam Smith reincarnate.

Do you sense that a political agenda overwhelms objectivity?...

The current political economy is a product of the past, and the past was not laissez faire...

The recent nationalization of the mortgage market and of major banks represent leaps in the degree of intervention. Still, they can be seen as a logical continuation of what has gone before. The crises produced by intervention summon forth further, more intense intervention. This is the way historical capitalism has worked.

Fortunately, we have an alternative: freedom and the free market.

read the entire essay

My thoughts: Perhaps it is time to totally abandon the word capitalism (the mixed economy verison) that is rapidly becoming corporatism. Supporters of freedom and free economy should embrace the terms free markets and laissez-faire.

Bailout: Theory and Crisis

Theory and Crisis

Any bailout plan that is believed to be potentially effective must be based on a theory. Otherwise it would merely be a shot in the dark. If you asked a TARP advocate why the intervention is necessary, he presumably would explain the problem and how the bailout would remedy it. For example, he might say that when the government borrows $700 billion in order to buy banks' bad mortgage-backed securities, it will inject liquidity into the credit markets and improve the economy. But that is a theory. (It's a bad theory, but it is a theory.)...

Free-market theory can explain the cause of the crisis -- government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off -- way off -- and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation.

What is the alternative theory used by those who have jettisoned free-market theory in "this time of crisis"? Why should we believe that things will be fine only if the government has the discretionary power to transfer resources from those who haven't screwed up to those who have?

read the entire essay

My thoughts: Markets work, socialism does not.

The Pretense of Regulatory Knowledge

Advocates of the free market are sometimes parodied for their seemingly all-purpose answer to any problem: Let the market handle it. What may sound like a simplistic answer, however, is actually the most complex prescription imaginable. In the modern world, the workings of any particular market are so complicated, they are beyond the grasp of mere mortals. Moment by moment, day by day, so many subtly interrelated decisions are made by so many people worldwide that no individual or group could possibly understand the big picture in any detailed way. So there is nothing simplistic about proposing the market as a solution to an economic problem. It’s short way of saying: let the multitude of knowledgeable people seeking profit, risking their own money, and responding to incentives find a solution based on persuasion not force. Translated that way, it sounds like a promising approach.

Ironically, those who don’t appreciate markets are in fact the ones who offer a simplistic, even empty alleged solution to economic problems: government regulation. That phrase is uttered like an incantation, the magical answer to all doubts about how, in the absence of fully free markets, problems would be solved. The irony is that while “let the market handle it” can be unpacked and made specific, “regulation” cannot. It can only be interpreted this way: Appoint a czar or a committee to somehow watch over things, and all will be well...

But chanting “regulation” and “oversight” is not a solution to anything. It raises more questions than it answers. Even if we assume the regulatory body would be populated by honest, disinterested people (a wild assumption, we should realize by now), how would they know what to do? As noted, markets are complex beyond imagination. One may have a great deal of knowledge about one’s own sliver of a given market, but that would count for nothing were one called on to regulate the whole thing. Sure, the committee could collect data. But to what avail? Data are history. By the time it is collected, it is old...

In opposing government regulation, no free-market advocate believes the public should be left to the mercy of reckless speculators, short-sellers, and the like, whose activities have the potential to harm bystanders. The public does indeed need protection. What the free-market advocate understands, however, is that regulation is not protection but merely a shoddy, deceptive substitute for the only real protection available: market discipline.

read the entire essay

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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Recommended Reading: An Unstimulating Idea

An Unstimulating Idea
Sheldon Richman

If we needed further demonstration of the folly that is the American political-economic system, there it is. The leaders of the interventionist state and the candidates who aspire to command it will continue to produce this inanity until people see it for the balderdash it is and resoundingly reject it.

The problem is that most people don't see it for what it is. When told economic activity is slowing down, they demand that their "leaders" and candidates assure them there is a Plan to keep them safe. The politicians are more than happy to oblige. Details don't matter much. As long as the president and the presidential aspirants adopt a somber yet hopeful and determined tone, pepper their speeches with big-sounding numbers and reassuring words, and promise to hand out money, most voters will be satisfied. They won't think about what's being said long enough to realize that none of it makes sense. They just want someone to make them feel safe, and there will be no shortage of such someones...

We are in our present position because government has burdened us with taxes, spending, debt, regulations, subsidies, guarantees (to lenders, for example), trade restrictions, fiat money, and other impositions. Between the endless domestic schemes and war, we are being crushed by the weight of the state. We don't need a stimulus. We need freedom.

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