Thursday, December 18, 2008

Abandoning Capitalism to Save Capitalism?

Over the past few months we’ve seen the most extensive government intervention in the economy since the 1930’s. In fact, today’s interventions sometimes make those of Franklin Roosevelt look tame by comparison.

Depending upon how you calculate the numbers—and that is made particularly difficult because neither the Federal Reserve or the Treasury is being particularly transparent about what they are doing—the Federal government is already on the hook for around $8 Trillion to address the current economic crisis. The CATO institute puts the number at $8.4 Trillion.

Much of that money has gone to direct investments in the financial industry, which has been partially nationalized. All indications are that soon the taxpayers will become part owners of one or more automobile manufacturers, and that the next President will be appointing a “car czar” to direct the restructuring of the auto industry, as if a government appointee can devise a magic formula for making the car companies profitable again.

This is nuts.

It would be one thing if there was any evidence that all this mucking about in the economy was doing any good, but in the months since government intervention in the economy went into overdrive the economic slump has only gotten worse. Much worse, in fact.

George Bush says that in addressing today’s financial crisis he has had to “abandon free-market principles to save the free-market system." Well, the President has certainly succeeded in abandoning free market principles, but it’s hard to see how doing so has succeeded in saving the free market system.

All this government activity has been driven by an illusion that is shared by most politicians: that somehow, some way they can control the economy. That illusion has caused more harm over the past century than all the recessions that are an inevitable part of a capitalist economy.

There has been a growing consensus among economists that the great depression became “great” precisely because of a series of policy mistakes made by Hoover, Roosevelt, and the Federal Reserve. Japan experienced a “lost decade” of economic decline after its own real estate bubble collapsed because its government tried to prop up “zombie” banks and businesses long after it was clear that they needed to go out of business. Japan blew so much money on useless “stimulus” packages that their national debt makes ours look responsible by comparison (so far). Sound familiar?

The shortest path out of the economic mess we are in is to allow the markets to correct, however painful that might be in the short run. The alternative—abandoning free market principles and the long-term benefits of free markets—promises not just a difficult recession, but a permanent slowing of economic growth and a huge increase in the national debt.

The best way to “save the free market system” is to allow it to work.

By David Strom, Senior Policy Fellow at the Minnesota Free Market Institute

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