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Jewish World Review Sept. 7, 2011 / 8 Elul, 5771 To help the economy, stop trying By Robert Robb
http://www.JewishWorldReview.com |
The U.S. political economy is in a bad and awkward place right now.
The economy appears to have stagnated with unemployment painfully high. As a result, elected leaders feel mounting political pressure to do something to get the economy moving again.
Yet, one of the things the economy needs to start moving again is for government to stop trying to help it.
People have a hard time understanding how economic growth can just happen on its own. This is particularly true for those on the left, who tend to view the private economy as just another government program. But it's also true among politicians on the right, who profess to have a superior understanding of how the private economy works but still propound short-term fixes for it.
Economic growth, however, does just happen. Wealth is created when voluntary trade leaves both parties feeling better off. Economic growth occurs when there is a virtuous expansion of such voluntary trades.
Government can help create an environment that facilities such a virtuous expansion, through growth-friendly and long-term tax and regulatory policies and quality public services and facilities. And government can do a lot to stifle such a virtuous expansion through the creation of an adverse environment.
Government, however, really cannot do anything to kick-start such a virtuous expansion. And attempting to do so, in fact, often contributes to the creation of an adverse environment that inhibits it.
Let's illustrate through a review of our recent economic history.
When the banks got in trouble in the fall of 2008, there was a consensus left and right that government needed to take action to prop them up. I disagree with this consensus, but let's assume it was correct and the actions taken to prop up the banks - providing public capital, expanding Fed lending facilities, a Fed guarantee of money market principal - were necessary.
About a year later, the banks had largely paid back the capital and were turning a profit (suggesting they weren't really that sick to begin with). So, that crisis was over. Yet the economy was in sorry shape.
Ever since, the government has been trying, unsuccessfully, to kick-start the virtuous expansion of voluntary trades.
The government embarked on a massive stimulus spending program. The only residual effect is a massive overinvestment in repaving, since that was about the only public construction projects that were truly "shovel-ready."
The Fed embarked on a massive monetary expansion. This has gone well beyond what was necessary to supply the banks with liquidity. It has been an attempt to kick-start the economy through low interest rates.
All that this monetary expansion has really accomplished is to severely punish small savers. If low interest rates could kick-start a virtuous expansion of voluntary trades, we'd all be driving Bentleys and living in mansions by now.
For further illustration, let's look at the housing sector. By the end of 2008, it was clear that there was a significant oversupply of houses. Over time, this would work itself out. People haven't lost their desire to live in a new home. When the oversupply was worked through, the new home construction industry would be back in business.
Government, however, was unwilling to wait and has tried numerous programs to try to revive the housing sector, even in the midst of what everyone acknowledges is a serious oversupply. They have all, predictably, failed.
All that's been accomplished by these governmental attempts to spark a virtuous expansion of voluntary trades is a huge increase in the federal debt, confusion in individual markets and uncertainty about the future value of the dollar.
Yet President Obama is about to give a big speech offering yet more ideas about what government can do to kick-start the economy. And Fed Chairman Ben Bernanke is mulling debasing the currency even further. It's as though the last three years hadn't happened.
In reality, Obama does more to help the economy when he plays golf. And the dollar would be sounder if Bernanke had just stayed in Jackson Hole.
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JWR contributor Robert Robb is a columnist for The Arizona Republic. Comment by clicking here.
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