Friday, March 13, 2009

Economic Policy or Economic Paradigm?

This article on Yahoo News was brought to my attention today. President Obama's desire for stable economic growth is understandable, laudable even. However, wanting economic growth in a free market without accepting the fact that free markets have downturns as well as growth is something of a pipe dream. As I have said before, one of the fundamental features of a free market is the unstable nature of growth. To change that would be to change the economic system which we live with and, as has been shown numerous times by the countries that try centralized economic planning and heavy price regulation, the chaotic nature of capitalism tends to promote growth best.

Now, I understand the President says he doesn't wish to supplant the private sector, merely to regulate it in such a manner as to prevent the “reckless speculation and spending beyond our means; on bad credit and inflated home prices and over leveraged banks.” He also said, “Such activity isn’t the creation of lasting wealth. It’s the illusion of prosperity, and it hurts us all in the end.” Which is, of course, why his spending plan calls for the US government to borrow heavily so that the government can spend beyond its means and create the illusion as economic growth.

However, is government action the correct answer to a market crisis (in this case a crisis precipitated by the financial markets)? Is the answer to regulate the market until it, supposedly, cannot fluctuate so drastically? Or is the answer to allow the fluctuation to amputate the non-functioning segments? To allow economic Darwinism (by which I mean profitability, aka, greed) streamline the market until it flows smoothly again seems like a painful alternative to the easy way out of letting the government handle our mistakes.

As a warning against a greater degree of government intervention, I present the findings of the Cato Institute relating to the relationship between financial deregulation and financial crises. According to the study, financial deregulation in itself does not lead to financial instability, as half of the countries in the study that deregulated their financial systems experienced market instability and half did not. The findings point to the size of the country's government as the pivotal factor in whether or not the country will experience a financial crisis: the larger the government, the more likely the market will not self adjust without crisis.

What does all of this mean? It means that continued government interference and "help" is more likely to maintain economic instability rather than promote economic growth. As further evidence of this claim I put forward the theory, increasingly popular as economists study it, that the New Deal prolonged the Great Depression. Also, there is the claim that the government's intervention in the financial market increased the market drop last year. As it is, I wonder how long it will be before the people of this country remember that economic trouble means a shift in the economy as well as economic opportunity to those brave enough to take personal risks. This economy became the world's largest through risk and perseverance rather than cowardice and government control.

"You and I are told we must choose between a left or right, but I suggest there is no such thing as a left or right. There is only an up or down. Up to man's age-old dream -- the maximum of individual freedom consistent with order - or down to the ant heap of totalitarianism. Regardless of their sincerity, their humanitarian motives, those who would sacrifice freedom for security have embarked on this downward path. Plutarch warned, 'The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits.' " -- Ronald Reagan, October 27, 1964


  1. From a controls standpoint, it's not hard to see how more government produces more instability. They always get the idea that the way to respond to a perceived crisis is to create the perception that they're taking major, bold, decisive action when a careful and measured action - or no action - may be the more appropriate choice. It's kind of like trying to hold a car at a steady speed by flooring it any time you are below the target speed and completely lifting off the gas when your speed rises above it; taking extremely decisive action creates instability rather than helps it.

  2. Part of the problem with governmental reaction to economic cycles comes from the time delay in seeing the effect of actions. By the time any actions have an impact on the business cycle, the cycle is already turning in the opposite direction, magnifying the impact of govenrment action.

    Think of it as a child playing on a swing. If the adult watching the child needs to slow the swing, they should push in the opposite direction of the swing at the low point of the arc. Govenment action is delayed so that the push comes at th ends of the arc, in effect adding to the momentum of the swing.