Wednesday, November 19, 2008

the problem with government intervention

a friend recently asked me about my rationale for distrusting government intervention. is it really true that government intervention tends to make things worse? what's the evidence for that, she asked?

a current example would be the federal government's response to the current economic crisis. under 'conservative' george w. bush, it has been shoveling money at businesses "too big to fail" and buying an interest in some of them (why isn't anyone calling that socialism?). it has passed a $700 billion dollar bailout with no clear plan for what to do with the money, and with the prospect of rapidly expanding its powers. all of this, we were told, was to avert disaster in the economy, and anxious congressional representatives and senators lined up to pass the bill, shortly before the election; no one wanted to be perceived as "not doing enough."

less than two weeks after the election, treasury secretary henry paulson is on his third plan for what to do with the $700 billion -- with the possibility of more to come. even mainstream pundits are finally turning on the bailout; ed koch, floyd norris, and the wall street journal are concerned. their number is greatly multiplied as people look at the proposed bailout of the auto industry. now congress is grilling paulson and fed chariman ben bernanke. everyone suddenly wants answers (you can read about it here).

not surprisingly, the government's actions have not kept the economy from continuing to sour. they'll say that it's because there hasn't been enough time, or because it hasn't been enough intervention. but the truth is that they didn't understand what caused the problem and didn't know what to do when things began to unravel. they never knew whether or not the bailout would help, and they still don't. but it won't stop them from thinking of new ways to spend. they'll pass new bills -- economic stimulus package, anyone? -- and intervene in more and more sectors of the economy. they aren't 'saving the free market;' this is crony capitalism at its worst.

and one might even tolerate that if it helped the economy to get on the right track. the problem is that their intervention makes things worse. it actually slows the recovery because it creates uncertainty in the market to keep changing rules in the middle of the game. people and businesses can't make rational decisions when they're wondering if the government might come along with a big 'rescue.' with its sometimes well-intentioned actions (or in some cases, the implied promise of acting), the government creates a moral hazard, causing participants to act in ways that otherwise wouldn't make sense, in the hope of receiving 'help.' john stossel does a fine job of explaining some of the difficulties here.

moreover, the government's costly interference sends budget deficits and the national debt soaring -- effectively charging huge purchases to the nation's credit card, and leaving the bill for future generations. what would you think of parents who refuse to live within their means and keep running up huge debt, figuring that their kids and grandkids can always pay it off later? that's worse than unhelpful; it's immoral.

why is all of this so predictable? because government operates without many of the constraints of a private enterprise. it does not have to compete for customers. it does not have to make a profit to survive. it never has to be careful with money lest it risk going out of existence, as it can always tax or print more money. these factors allow it to continue in inefficiency and ineffectiveness long after a business would have had to change its ways or go belly up. there is little incentive to remove ineffective or even corrupt workers and leaders, or to change policies that aren't working.

so now people aren't happy with the bailout. but what will they do about it if the government throws tens of billions at the auto industry -- or plunks down more cash for aig a.k.a. 'the money pit?' at best, they remove this group of representatives, only to have the next group continue pouring their money down the same failed hole -- as will happen when the obama's liberal democratic administration replaces bush's conservative republican one.

i should be clear in stating that i don't think free markets solve every problem. but the current economic crisis is a great example of how sometimes, the government's doing something is worse than doing 'nothing.'

No comments: