Paul

Ibrahim

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December 1, 2008

Time for Government to Stop ‘Fixing’ the Economy

Few headlines are more frightening than those announcing grand government plans to “repair” the economy. Every time a news headline reads “Congress Anxious to Address Economy” or “Obama Will ‘Do What’s Necessary’ to Fix Economy,” Americans should start worrying twice as much about their economic future as they already do.

Few political arguments these days are backed up with facts, but in this case there is vast empirical evidence that governmental action on economic issues almost always exacerbates existing economic problems and often creates new ones (the exception, of course, being when government acts to undo interventionist policies it had previously adopted).

As of this past summer, 90 percent of the gains in the Dow Jones Industrial Average in the past 111 years has come when Congress was in recess. This trend started to become even more lopsided a few decades ago when the degree of government intervention in the American economy intensified rapidly. In the past 45 years, for instance, the S&P 500 Index barely went up 1.6 percent yearly when Congress was in session, but shot up to a striking annual average of 17.6 percent when Congress was out of session.

How can this dramatic inverse correlation be explained?

First, there is the element of uncertainty. When Congress is in session, the market knows that some industry is going to get hurt by some new regulation from politicians seeking to gratify their special interests, and that another industry is going to have its lobbying dollars rewarded with a nice, arbitrary subsidy. What the market doesn’t know is which industries will be affected, and where political decisions will force money to be invested. On the other hand, when Congress is in recess, investors are more likely to invest in industries that will create jobs, quality products, efficient business models and wealth.

Second, members of Congress are convinced that just because they are on Capitol Hill, they must do something. Even if the economy is in good shape, but especially if it is not, the Hill’s and media’s assumption that Congress must “do something” is a foregone conclusion. The question only becomes what exactly they must do. It rarely occurs to them that most of the time, the best thing they can do for the economy is to just stay out of the way. But because of the culture of unnecessary and counterproductive need for action, policies are enacted by Congress that usually harm the economy and thus hurt the markets.

This urge to “do something” has been tried repeatedly in American history, and has failed as many times. During the Great Depression, for instance, President Herbert Hoover was urged to “do something.” He did. Hoover signed the Smoot-Hawley Tariff Act, which impaired free trade, supported an increase in taxes and made attempts to provide government-sponsored jobs. As good economists predicted at the time, these policies only made the situation worse.

But that did not stop Franklin Roosevelt from adopting similar anti-growth policies. Roosevelt’s massive expansion of government and attempt to “create” new jobs did nothing but to prolong the Great Depression until World War II. What Roosevelt didn’t understand is that government can never “create” jobs, it can only reassign them. When government funds a new public sector job, it has taken enough money out of the economy to defund a private sector job that was going to be efficiently and sustainably created by the free market.

So it took both a Republican and a Democrat to turn the Great Depression into a greater depression. Likewise, it is taking us both the Bush Administration and the Obama Administration to move the economy from somewhat off-course to going in reverse. Will they ever learn?

Uncertainty is killing the market today. Americans – intelligent Americans who normally act based on reasonable market expectations – cannot make investment decisions because they know that their fates would depend not on realistic market behavior, but on the whim of politicians. And today’s wild financial swings, the likes of which we have never seen before, are a direct result of uncertainty over what the government will do.

Despite this precedent of government intervention in the economy, America still boasts a history of minimal interventionism when compared to other world governments. Is it thus a coincidence that we have the greatest and most successful economy in the history of the world? Why, then, are we going in the exact direction that less successful countries have gone in? Why, since we have proved to the world that the freest markets become the wealthiest ones, are we ignoring the very same lesson we are supposed to be teaching the rest?

Virtually all the wealth we have today – the cars, the light bulbs, the surgeries, the music, the Thanksgiving turkeys, the fact that you can reliably find an unimaginable variety of products when you need them – comes from the free market and from the private sector. This wealth is the direct result of billions and billions of interactions between people who, through their actions, decide where their resources would be most efficiently used.

So how can 535 congressmen, one Treasury Secretary and one president claim to be in a position to know how best to allocate the resources of 300 million people? It simply cannot be done – at least not in good conscience.

The only “something” that government can and must do is, indeed, to undo its interventionist policies of high taxes, excessive regulation and dubious subsidies to cozy corporations. But beyond that, it is time for government to stop “fixing” the economy. Good leaders aren’t ones who do the most, but ones who do what is right. And sometimes, the right thing to do is stay out of the way.

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