Big government is counterproductive
Commentator Susan Lee says even though Americans' political will may be lacking in this financial crisis, the economic argument for less government intervention is as powerful as ever.
Susan Lee (Marketplace)
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TEXT OF COMMENTARY
Kai Ryssdal: This is a time when free market types really have to be sure of themselves to stick to their guns. The biggest bailout, or rescue, in this country's history is unfolding right before our eyes. Just today we had the lender of last resort, as I mentioned, the Federal Reserve, plug itself directly into the corporate finance structure. Throw in Fannie and Freddie, AIG and Bear Stearns and it's fair to ask, Who's next? Because commentator and economist Susan Lee says the era of laissez-faire economics is over.
Susan Lee: For the past 25 years, presidents have promised to reduce the size of government. They've vowed to create a leaner, more productive state. But the result has been more of the same-old bureaucratic giant.
Consider Ronald Reagan who came into office after campaigning vigorously to reduce the size of the government. But eight years later, by most measures, nothing much had happened. Since Reagan, no administration has able to announce: "Hey, honey, I shrank the government."
Even though the political will may be lacking, the economic argument for less government intervention is as powerful as ever.
Government solutions don't work. In fact, they usually generate more and bigger problems.
Just take a look at monetary policy. Back in 1998, when the giant hedge fund Long Term Capital Management went under, the Fed rushed to the rescue. Tons of unnecessary dollars were pumped out. Those dollars generated the dot-com bubble. When that bubble burst in 2001, the Fed again threw dollars at the crisis, generating the housing bubble. And when that bubble burst last year, the Fed once again shoveled out more dollars which will, eventually, create another crisis somewhere else.
The same perverse effects happen on the fiscal side as well. Increases in government loans for college students have ratcheted up tuition. Tax policies designed to help lower-income families has created a nightmare of complicated tax returns -- for everybody.
Advocates of smaller government have bobbled the ball by arguing that big government is wasteful. Or not constitutional. They're right, but the slam-dunk is to point out the obvious: Big government is counterproductive -- it creates unintended consequences right and left.
OK, so you're not going to hear this from McCain or Obama. You're not even going to hear it from the Libertarian candidate. It's the kind of argument economists make and, of course, nobody listens to us.
Ryssdal: Economist Susan Lee lives in New York City.
Comments
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From Providence, UT, 10/10/2008
To answer the two questions below, asking for socialism-free examples:
Certainly the early US was a "libertarian" (though the term had not been coined) or non-socialist model, as have been some European and Asian city-states. They rise rapidly in prosperity, until the power of such prosperity becomes too alluring for those in political power. They involve first into banking, then big business, then services, then small business, then personal lives as the final coup.
There are also some US States (mostly the intermountain states) that have a culture of mistrust of their Federal gov't, and they feel the boom-bust pains of economic crises - such as current - less than other states that allow themselves more federal involvement.
Whatever the case, we see and have a history of what happens when government and business intermix. Socialism has a history of failures, primarily because it is the pathway to inevitable totalitarianism.
If, ideologically, that is not ugly enough for you, then look at it from this approach: the Austro-Libertarians have been the only reliable source of warnings, predictions and usable economic intelligence. Such is not the case for the Keyensians, not the Chicago schools, none of the Socialist schools, etc. to which mainstream media subscribe and the subsequent faulty information fed to the masses.
As a personal example, my reading of Austro-Libertarian economic information prompted me to put my business, banking, home and investments in proper order over the past 18 months and the past two months have correctly born out the correct nature of that information, on a micro and macro level.
That's the shortest answer I can muster. Given the world's tragic failures at governments, maybe that would be impetus alone to try a libertarian politico-economic model. It can't be worse than the clumsy warfare-welfare-kleptocracy we have now.
From middlesex, VT, 10/09/2008
Susan Lee was pretty coy indicting "the Fed". Too bad she wasn't able to speak truth to power: Behind the anonymous "Fed" was the hand of the great machiavellian Alan Greenspan, bubble builder extraordinaire. Now could we have a chorus of the Gang of Four's "Capital it Fails Us Now", please?
From middlesex, VT, 10/09/2008
Susan Lee was pretty coy indicting "the Fed". Too bad she wasn't able to speak truth to power: Behind the anonymous "Fed" was the hand of the great machiavellian Alan Greenspan, bubble builder extraordinaire. Now could we have a chorus of the Gang of Four's "Capital it Fails Us Now", please?
From San Diego, CA, 10/09/2008
I have a question - is there an example of a country that has (or has had) the type of economy that seems to be advocated in this commentary? I'm not trying to bait anyone or start an argument - it's just that I hear this assertion often, but I don't know enough about markets around the world and throughout history to know whether this has actually been done before. Particularly, has it been done anytime recently? How do we know it works?
From Seattle, WA, 10/09/2008
Many of the comments here and elsewhere (and several congressmen) say we should avoid government economic intervention because it will lead to "socialism." Can someone clearly, succinctly say what socialism is and why it should be avoided? Would we be trading off wealth for security in a more "socialistic" system?
From Providence, UT, 10/08/2008
I guess one shouldn't expect the clumping and mythology-fed masses to react using too much intelligence or logic. Our country is quite full of socialists and economic ignoramuses. I see the State-run public schools are teaching economics to many of the above shrills as well as they do math, language and science.
Or, perhaps Susan Lee's detractors here comprise the venal and increasing number of government dependents who don't like seeing any hint of denigration to their doling regime.
True free markets are unassailable. We've not had a genuine free market for many decades. And, using an anarchical Somalian mess as an example of "libertarian" is patently foolish.
The Fed's creation of artificially easy credit has created a trough at which government and corporate animals feed. Additionally, consider the insanity of government-forced home lending.
There was once a Libertarian island on which those that loved liberty prospered. It was, however, taken over by pride and the lust for control of others.
From dayton, OH, 10/08/2008
I should know better than to listen to this show while driving, as I had to fight through the urge to climb through my radio,& throttle Ms. Lee as she spoke. Another free marketeer crying "If you'd only given us 100% of what we wanted instead of 90%, none of this would have happened." What happened is money brokers can no more be trusted to support an economy, than teen-aged boys can be trusted with liquor & car keys.
From Pittsboro, NC, 10/08/2008
A true free capitalist environment means that all the buyers and sellers are insignificant with respect to the whole. Republicans and Democrats alike forgot to slice up Fannie Mae, Freddie Mac and the other overwhelmingly big financial institutional investors so that they did not violate a basic free market principle. One could call enforcing this principle regulation. Congress and the presidents fell asleep on their job on managing this fundamental principle of a free capitalist republic.
From Dallas, TX, 10/08/2008
The housing bubble was not caused by the .com collapse. It was caused by an endless supply of cheap and easy credit. Had people used good sense and just said no, I cannot afford a $400k house on $50k a year, this would have never happened. Of course good regulation would have helped too.
Libertarians are not anti-government. They are not anti-regulation. In all things there must be moderation and a balance. We also are quick to point out human causes and demand personal responsibility and accountability for our actions.
From South Portland, ME, 10/08/2008
Most people making comments here need to take an economics class, we do not have a free market economy - Fannie Mae and Freddie Mac who are one of the causes of this mess are GSE's and were essentially government monopolies, and no one here is talking about monetary policy and how the Fed gave us artificially low interest rates which just pumped more credit into the economy which causes inflation, so the people here that are for the bailouts are essentially stating we need to pay off bad credit with more credit, these are the same people who probably take a cash advance out on their visa to pay for their American Express Bill. Susan is right less government is better - more government just creates socialism. We need to cut spending and you can't cut spending unless you cut the size of the government. Higher taxes are just counter productive.
From Washington, DC, 10/08/2008
There is a country that practices a pure form of capitalism: Somalia. It is a libertarian's dream. No government. But it is very dangerous living in a violent kleptocracy.
There is a reason why practitioners of the dismal science are not istened.to. Reagan joked that you could line the up end to end and never reach a conclusion. This one has reached a conclusion, however it is a cross dressing political argument.
The point is that governments provide the ground rules for markets (legal system), they enforce market outcomes and they provide the infrastructure so that markets can operate. What we are experiencing now is a panic - a loss of confidence - which governments are scrambling to restore. Arguing for less government now like arguing that fire departments should not have put out the San Francisco fire. Letting years of capital be consumed in panics or economic shocks is not a solution, unless you are as mad as Nero. No wonder no one listens to economists.
From Bethel, CT, 10/08/2008
Anyone else think that "Libertarian Island" would be a great reality show? Let's see a gang of them put the whole grand scheme into action, and see if they can keep it going even one season. Really, though, Rivka Shenhav is right, just seeing laissez-faire fail (again) would not dissuade the true believers.
From Pendleton, OR, 10/07/2008
Was it also too much government regulation in the marketplace that caused the last depression? From Ms. Lee's arguments one must assume so.
From New York, NY, 10/07/2008
Oh Sweet Father Beelzebub, what kind of glue has Susan Lee been sniffing? I want some!
Really, it's great to hear that somewhere in New York there are people sitting around discussing the contemporary relevance of Hayek's Road to Serfdom. They're probably just a few cafes over from the dead-enders discussing the contemporary relevance of das Kapital. But have they lost all sense of irony?
In New York, bashing government? Apart from chartering the Dutch company that founded the City, apart from laying out the famous grid of the City, apart from the many parks, apart from the subways and bridges and tunnels and airports, apart from the water and sewers, apart from the educated populace and the top universities, apart from the advances in science and technology and public health, apart from all that -- What has government ever done for us?
Footnote: hopefully the reader catches the reference to Monty Python's Life of Brian: "All right, but apart from sanitation, medicine, education, wine, public order, irrigation, roads, the fresh water system and public health, what have the Romans ever done for us?" "Brought peace?" "Oh, peace - shut up!"
But seriously, I just want to know what she's sniffing, I've gotta kill off the brain cells that remember what my retirement account used to be...
From Jacksonville, FL, 10/07/2008
Can anyone validate the statement that "...when the giant hedge fund Long Term Capital Management went under, the Fed rushed to the rescue. Tons of unnecessary dollars were pumped out. Those dollars generated the dot-com bubble"? Am I hearing this right? The government rescue of LCTM "caused" the dot-com bubble??!!
From Jonesboro, AR, 10/07/2008
In speaking of the Long Term Capital Management (LTCM) debacle, Ms. Lee seems to infer that public money was used to bail out the hedge fund, which was not the case. Yes, the Fed was involved, but its role was to benevolently coerce the major Wall Street investment firms to inject enough capital into the fund to buy enough time (and 90% of the fund) to close out the fund's positions in a more orderly fashion. Private money was used to prop up the sinking ship and, true, it may not have been an efficient use of capital. But, the Fed taking the action that it did effectively limited the damage to Wall Street - not Main Street.
From Chandler, AZ, 10/07/2008
This is right on.
I'm tired of people blaming this situation on free-market capitalism. We don't live in a free market! When you give up 30-35% of your income in taxes, that 35% is not a free market. All of that money is being spent by the government which means consumers are no longer choosing to spent that money on the products they deem to be most valuable. When the government has a monopoly on printing fiat money, that is not a free market.
Libertarians like Ms. Lee argue for things like:
- sound money backed by gold
- balanced budgets
- no government involvement propping up mortgage market
- abolition of the Federal Reserve
This bubble could never have happened in a free market. Housing prices would not be tanking because they never would have bubbled up in this first place without irresponsible monetary policy. The unregulated market particpants who gambled on CDO's and complex credit instruments would have done so at their own peril.
This crisis and subsequent bailout is a classic case of Harry Browne's government model. Browne stated that first government breaks your leg and then it hands you a crutch and says, "See! Without me, you could not walk!"
I am going to listen to the people who predicted this all along. Those people are all Austrian School economists like Ron Paul, Peter Schiff, and Nouriel Roubini. If it makes you feel good inside, you can listen to all of the big-government economic pundits you want. Just don't let them manage your portfolio.
From Jersey City, NJ, 10/07/2008
Why does Ms. Lee believe that "tax policies designed to help lower-income families" cause a paperwork burden "for everybody"? My income is near the national median. I rent my home. My tax returns are simple. I skip the part about the earned income credit (I'm too rich), and it doesn't pay for me to itemize deductions (I'm too poor). It seems to me the complexity Ms. Lee complains about, if from her own experience, is probably caused by the provisions designed to benefit members of her socio-economic class, not the poor.
From San Francisco, CA, 10/07/2008
I'm not an economist, but this piece seems to ignore one of the most central ideas of economics and government -- The "Tragedy of the Commons". If there is any public resource that can be exploited or way to game a system, people will find a way to do it. The role of government is to create the basic rules by which everyone plays. The current mess is the result of the government allowing several parts of Wall Street to make up their own rules without the oversight of government. What they came up with, CDOs and sub-prime mortgages, is reeking havoc on the market, like a giant herd of cattle trampling through the village commons. Government's role is to protect the commons from this type of unbridled greed. This is the only way to create a healthy economy, a healthy population and a healthy planet.
From Saratoga, CA, 10/07/2008
Ms Lee, like many Liberarian economists will stick to her theology regardless of how many times it fails. If it fails - it must be the fault of government and not the human factors (e.g. greed and corruption) that Liberaterians never allow for in their theories or the fact that information is not ubiquitously available to everyone in the market. Dot com boom had absolutely nothing to do with government money or the S&L rescue and neither did the current financial disaster. It has to do with the failure of markets to regulate themselves and the long time constants associated with markets self-correction. I suggest that she tries to get her facts right and try to understand the underlying system before analyzing its failure.
From Brunswick, ME, 10/07/2008
I would hope and expect that an economist would be more adept at acknowledging nuance and complexity in the web of cause-and-effect that generated the dot-com and housing bubbles than to blame it on "big government". This is about as enlightening as blaming all our economic woes on greed. Big government is not the problem; bad government is. Inefficiency and shortsightedness are the problems here, and these are neither necessary nor unique attributes of government.
From Cleveland, OH, 10/07/2008
The fact that the remedies you cite produced unintended consequences doesn't logically lead to the conclusion that all government solutions, big or small, are wrongheaded. Cheap fuel leads to land yachts, the value of oil leads to burning off natural gas in order to more efficiently get to oil. These are relatively free market activities yet they have negative consequences. What you seem to be arguing against are short-sighted and/or wrong-headed policies. Government does not have a monopoly on these sectors!
From Boise, ID, 10/07/2008
I cannot believe your economist's comments. We are in the mess because of Reagan's idea of the trickle down economics and the unregulated economy. The idiot thought the market would regulate itself. Business and banking are the largest government benefactors in this economy. The last thing they want is a free market and no big govt to save them.
From Wesley Chapel, FL, 10/07/2008
It is so good to hear sound economic sense. What do we do as individuals to bring government spending under control. Like you said, it has been the same old scenario administration after administration. I am so fed up with the out of control fiscal irresponsibility of our elected leaders, but what can we do to bring about economic stability and accountability? Thanks for your commentary "Big Government is Counterproductive." I couldn't agree more.
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