On social democracy and the financial debacle of 2008

The financial crisis that erupted for real in 2008 was just another convulsion in the corpulent body of social democracy. "Social democracy" is the relatively modern and sadly mistaken notion that government should solve social problems as they arise.

The body of "social democracy" is the huge mass of laws that has grown up over time, each law with little or no connection to the underlying cause of the issues that initiated the creation of the new legislation. There is little or no connection to the actual underlying issues because the vast majority of such laws are triggered by emotion—and "sold" to the voters based on tugs on the heartstrings—not rational thought.

When voters demand "action" [You've probably heard it hundreds of times. Something "bad" happens and people shake their heads and say, "There ought to be a law...."] and when politicians and bureaucrats provide "action", they are all naturally proceeding according to some theory as to the cause of the problem they are trying to solve. Furthermore, they are proceeding according to the theory of "social democracy"—that somehow it is the government's responsibility to protect every individual from virtually every stupid act, wrong decision, or bad choice.

If their theories are mistaken—and they generally are—the regulations are likely to produce unintended consequences that, later on, in principle, could be recognized as "mistakes" and rectified by repeal. In practice, however, regulations are almost never repealed. Instead, new government interventions and new regulations are instituted in further misguided attempts to "fix" the problems now created by the prior set of regulations.

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Adapted from an article by Jeffrey Friedman appearing in the "Cato Policy Report" (Jan/Feb 2010).

See also:

Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation

What Caused the Financial Crisis

On government’s role in getting the economy moving

The government's role in restoring a healthy economy is primarily to get out of the way and to reduce the economic dead-load of taxes and excessive regulation.

In the very same way that the energy required for a rocket or an aircraft to gain altitude increases as the affect of gravity increases, so too do taxes and regulation increase the “energy” necessary to make the economy rise.

Therefore, half-measures must be avoided entirely. Half-measures will produce tepid or, worse, no improvement, while allowing political critics to say, "We've tried your ideas, and they didn't work."

The reforms introduced must be bold, courageous, determined and, yes, some will be painful, as well.

• Some economic activity presently based on government interventions (e.g., subsidies, artificial demand) will cease to exist.
• Initial price-jumps following the removal of interventions that were, in fact, or worked effectively as price controls will be unavoidable. Thankfully, the removal of some interventions will bring price decreases, as well.
• Changes in the value of the U.S. Dollar are likely to occur. Protecting the U.S. economy against currency values being artificially manipulated by other nations (such as the Chinese Yuan) is not wrong as long as the protection imposed is directly correlated to the amount of manipulation in the estimated true value of the currency.
• Recognition that disparities in income and wealth are normal, natural and actually function as a healthy stimulus to production and the growth of the economy is essential and should be articulated to the voters in a clear way.

When legislation is proposed, the changes and the impacts of the changes must be announced and explained in advance. The long-term vision must be reiterated. The reason for the change must be clearly defended against every onslaught from the opposition, and then the effects of the changes must be "survived" as reality sets in.

The costs the people must bear during the readjustment of the economy should be shared as widely as possible by implementing measures that are clearly articulated as "temporary" to ease the transition. Otherwise, the fragile political support of those suffering the temporary pain of the readjustment will be lost.

Telling the truth and not promising things that cannot be delivered is the only safeguard to the credibility of the reforms and of the officeholders who see that the reforms are imperative to our nation's full recovery and restoration.

We are here to help!

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On the TSA, bailouts and needless economic interventions

The TSA (Transportation Security Administration) was a G.W. Bush bailout for the airlines because, after 9/11, there was a genuine fear of flying amongst the American public. So, the U.S. government stepped in to give Americans confidence to fly again.

However, all this action did was create a moral hazard for the airlines. Every time there is a failure in TSA's security, the airlines are not be held responsible, the U.S. government is. As a result, there is an ongoing degradation of liberty and the humiliation of the U.S. traveler at the hands of government officials.

If the airlines were responsible for security, there would be competition in security. That competition would drive toward maximum security with minimum damage to the travelers' liberties accompanied by minimum cost and inconvenience, as well.

Some airlines would do better than others. Prices might even be affected by how well airlines do in the security department. All-in-all, there would be improved security at a lower cost—and the travelers would bear all of the cost. The American taxpayer would not be held hostage as the payer of last resort in the event of ongoing failures or the need for new technologies.

Already the Obama administration has handed out favorable contracts for the production of the new x-ray machines and other TSA equipment to manufacturing firms strongly connected to unions. It is just one more way of intervening in the economy where the government need not be present at all.

On ObamaCare’s manipulation of markets

Imagine this:

Obama—”We need to bend the health care cost curve. I want the food industry to cut chocolate sales by 25 percent."

Industry—“But we would lose $100 million from the cutback.”

Obama—“Just raise the price of celery to recoup the $100 million.”

Industry—“Nobody will buy celery at the inflated price.”

Obama—“Not to worry. We'll impose a fine on any family that doesn't buy a sufficient quantity of celery.”

Sounds ridiculous, doesn't it?

Try this:

Obama—“A lot of sick people can't get insurance. I want the industry to cover pre-existing conditions.”

Industry—“But we would lose a fortune if we did.”

Obama—“Just raise the premiums paid by healthy people and sell more policies to those who aren't insured.”

Industry—“If we have to cover pre-existing conditions, healthy people won't buy policies until they're sick.”

Obama—“Not to worry. We'll impose a fine on any family that doesn't buy a policy now.”

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[Thanks to Robert Levy in the “Cato Policy Report” (March/April 2010)

On political strategy for restoring a healthy economy

The government's role in restoring a healthy economy is primarily to get out of the way and to reduce the economic deadweight loss due to taxes and excessive regulation (which is just a tax in another form).

Therefore, half-measures in reforming and downsizing of government must be avoided. Half-measures will produce tepid or, worse, no improvement, while allowing critics of reform and downsizing to say, "We've tried your ideas, and they didn't work."
Reforms introduced must be bold, courageous, determined and, yes, some—maybe, many—will be painful to some, as well.

Economic activity presently based on government interventions (e.g., subsidies, artificial demand) will cease to exist. Initial price-jumps following the removal of interventions that were actually or functioned effectively as price controls will be unavoidable. Changes in the value of the U.S. Dollar are also likely to occur.

Protecting the U.S. economy against currency values being artificially manipulated by other nations (such as the Chinese Yuan) is not wrong as long as the protection imposed is directly correlated to the amount of manipulation in the estimated true value of the currency.

Recognition that disparities in income and wealth are normal, natural and actually function as a healthy stimulus to production and the growth of the economy is essential and should be articulated to the voters in a clear way.When legislation is proposed, the changes and the impacts of the changes must be announced and explained in advance. Along with the announcement, the long-term vision must also be clearly articulated. The reason for the change must be clearly defended against every onslaught from the opposition, and then the effects of the changes must be "survived" as reality sets in.

The costs the people must bear during the readjustment of the economy should be shared as widely as possible by implementing measures that are clearly stated to be "temporary" to ease the transition. Otherwise, the fragile political support of those suffering the temporary pain of the readjustment will be lost.

Telling the truth and not promising things that cannot be delivered is the only safeguard to the credibility of the reforms and of the officeholders who see that the reforms are imperative to our nation's full recovery and restoration.

We—the many citizens out here who understand what must be endured in the process of turning the “fish soup” our American economy has become back into the “aquarium” it should be—are here to help!