Sunday, February 22, 2009

Less rather than more government intervention is needed to cure the recession

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. The misnamed stimulus law is now on the books. While nearly everyone believes the government has to do something to get the economy out of the recession, those who understand markets insist that we'd be better off if the government did nothing at all. 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. (Remember opportunity cost!) Doing nothing is indeed is an attractive option. For example, it would avoid re-stimulating parts of the economy shouldn't have been stimulated in the first place, such as housing and autos. As economist Mario Rizzo said recently, "Trying to prop up housing prices or injecting capital into areas of misallocation is a bad idea. It prevents the market's corrective mechanisms from working. Wealth should not continually be destroyed after the errors of the bubble have been revealed. This is the proverbial practice of throwing good money after bad." (Watch Rizzo's presentation here. The written remarks are downloadable here.)

But, frankly, doing nothing is only the second-best option. We can do better. We need the government to do less than nothing. It should undo many things.

Government-Inflated Bubble

Let's remember that government created the housing bubble through a constellation of policies that made borrowing for home mortgages - prime and subprime - artificially attractive. Because of the securitization of mortgages (in itself a good risk-spreading device), the consequences of government housing policies spread far beyond the housing and banking industries. When home prices seemed to be perpetually rising, people were encouraged to refinance their homes and withdraw equity so they could spend the money on cars, trips, and other big-ticket items. Government-stimulated demand touched everything. When the bubble popped - when interest rates rose and the housing glut became apparent - things turned around. People now had costly mortgages they couldn't refinance; homes bought on the expectation of early profitable resale were now money losers. The party was over.

It was a party that couldn't have been thrown without politicians eager to do things for us and, not coincidentally, to boost their reelection prospects as well. The upshot is that if the economy is to thrive again, the reigning philosophy of government as a social service center will have to change. Many things will have to be undone.

These things will strike most people as politically impossible, but if no one ever talks about them, that's what they will remain. We have to start somewhere. The first thing we need is a monetary system that is beyond the reach of manipulative politicians and political appointees. Whatever the Fed Reserve's role in the housing bubble - even if it was only the Alan Greenspan's promise to provide liquidity to overextended lenders - the central bank has again proven itself hazardous to our economic well-being. When will we cease to tolerate this continuing threat in our midst? When will we realize that the mortals who run it cannot know how much money the economy needs or what interest rates should be? Market-rooted money - most likely gold - and free banking are long overdue. How can we afford to wait any longer?

No More Housing Policy

Also on the list of things to go is every manifestation of housing policy. In a free society there would be no such thing. The alphabet soup of agencies - from HUD to FHA to FHLB, and the rest - should be abolished at once.

The same goes for those privileged cartoon characters Fannie Mae, Freddie Mac, Ginnie Mae, and any I may have overlooked. They exist to circumvent the market in order to carry out the agendas of politicians, who must dispense goodies to favored constituencies in order to keep their hold on power. Because the agencies are backed by captive taxpayers, they are can do things no free-market institution can do, such as obtain special low-interest loans and guarantees. These bureaucracies have no place in a free market. If we haven't learned that by now, what will it take? (We haven't learned it. The Obama administration wants to give them more billions.)

While we're at it, let's get rid of the income tax if for no other reason than because it would end the mortgage deduction. We must stop thinking of home-ownership as something worthy of government privilege. There's nothing magic about housing. It's one more thing we need. Yet it gets special treatment in the law, and economy-watchers give it special attention. Why do news agencies report housing starts faithfully each month as though the fate of the planet hangs in the balance? They never tell us how many computers, Coca-Colas, or boxes of Cheerios were produced.

Other taxes should be cut or abolished too, including the payroll tax, which is a tax on hiring. But - this is often overlooked - tax cuts without spending cuts require more borrowing and more inflation. It's a bad bargain in the tradition of Keynes. We must cut government spending along with taxes.

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!




Keith Burgess Jackson has a new site for exposing the academic thuggishness of far-Left law professor Brian Leiter

I Finally Figured It Out...: "I admit it. I've had a hard time figuring out how zealously borrowing and spending and subsidizing the unsuccessful is supposed to get us out of an economic crisis caused in large part by overly zealous borrowing and spending and encouraging the unsuccessful to take on obligations they couldn't meet. But now I've figured it out. Obama and his party like poor people so much they're determined to make lots more of them".

Bill Clinton gets one thing right: "Bill Clinton called on President Obama yesterday to show more of what he promised America during his two years as a presidential candidate: hope. Mr Clinton reflected growing misgivings among some Democrats that the President's warnings about the economy are so dire that he risks smothering the confidence that will be needed to get America out of the crisis. He urged Mr Obama - who ran on a message of hope - to put on a more positive face when speaking to the country about the economy. "I just want the American people to know that he's confident that we are going to get out of this and that he feels good about the long run," the former President told the Good Morning America programme.

President Klaus compares EU to Soviet-era dictatorships: "The leader of the Czech Republic has long been one of the most strident critics of the European Union, missing no opportunity to let another withering attack fly. Now he has inherited the ideal pulpit to air his views: the EU presidency itself. In his latest diatribe, this time before the European Parliament on Thursday, President Klaus, whose country assumed the rotating EU helm in January from France, branded the organisation an undemocratic and elitist project comparable to Soviet-era dictatorships that forbade free thought. "Not so long ago," Mr Klaus thundered, "in our part of Europe we lived in a political system that permitted no alternatives and therefore also no parliamentary opposition. We learned the bitter lesson that with no opposition, there is no freedom." He may have felt gratified by the reaction: boos from many lawmakers and a walkout by the left-wing parties - but applause from a minority of nationalists and other anti-EU legislators. While deeply unpopular in EU circles, Mr Klaus strikes a deep chord in some member states where citizens fear European plans to share more powers come at the cost of national sovereignty. He has refused to fly the EU flag over his official seat in Prague during the Czech presidency, saying the country is not an EU province."

How to slim the bureaucracy, British style: "Ministers have blown almost 1billion pounds axing an army of bureaucrats - only to rehire the same huge number. Government departments have cut almost 15,000 civil servants in the last three years, according to figures released by Parliament. Because of the generous redundancy packages given to Whitehall officials, the average payout was 60,000 - a total cost to the public purse of 882million. But despite the cull of Government waste, it can be revealed that ministries are taking on almost as many staff as they have ditched. Figures from just five departments - including the Home Office and Department of Health - show that about 5,000 permanent, temporary and agency staff have been taken on. If this is extended across all Government departments, the number of new staff will be around 15,000. Hundreds of civil servants have walked away with pay-offs worth tens of thousands of pounds, with some taking 100,000. Most of those taking voluntary redundancy are high earners - sparking fears the most experienced staff are disappearing from Whitehall. Incredibly, top officials have failed to carry out studies to discover whether the policy would trim budgets."


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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)


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