Government Intervention and The Great Depression

I liked today’s email newsletter statement from Andrew Davis, the Libertarian Party’s Director of Communications:

“The 1930s recession became the Great Depression because policymakers didn’t take the necessary actions,” said Democratic economic adviser Jared Bernstein in a recent Washington Post article. “Nobody wants to make that mistake this time around.”

This comment from Bernstein summarizes the prevailing mood of the Obama administration as it looks to take over the reins in January.  So, what does this mean for you, the taxpayer?

Unfortunately, more government spending.

Obama has just recently announced plans to spend at least $700 billion in order to stimulate the economy. This figure includes New Deal-styled programs that will explode the size of government, and dramatically add to the national debt—money that will be owed by generations to come.

Talk about redistributing the wealth!

Despite the obvious problems with government spending even more money when it should be cutting spending, Obama is projected to sign into law a new “Raw Deal” for the taxpayers within days of becoming president—if not even on the day he is inaugurated.

The justifications you will hear for this new spending all revolve around the “New Deal” policies of the Great Depression, so we thought you should know the truth about Obama’s “Raw Deal” and the myths behind what really pulled the U.S. out of the Great Depression.

Here’s a hint: It wasn’t FDR.

Like Democrats, “many people are looking back to the Great Depression and the New Deal for answers to our problems,” says George Mason University Economics Professor Tyler Cowen. “But while we can learn important lessons from this period, they’re not always the ones taught in school.”

What Cowen means is that the conventional wisdom of the Great Depression is absolutely wrong: Government spending did not save the economy.  “In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression.”

Harold L. Cole, an economist at UCLA, agrees with Cowen:

“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

This is the danger we face with Obama and his “Raw Deal” for taxpayers.  Instead of staying out of the economy and letting it work itself out, Obama is continuing the same policies as those of FDR and the Bush administration and spending taxpayer money that will have no positive results.

And it’s not just the spending we have to be worried about under an Obama administration; it is the regulatory policy that may come as a result of using capitalism as a scapegoat for the recent economic crisis.

“There is a familiar urge to restrict those who got us into this mess, but regulation is a nasty business—nasty because the law of unintended consequences is always there to show us how we got it wrong,” says Thomas F. Cooley, the Richard R. West Dean Of New York University’s Stern School Of Business, and Lee Ohanian, an economics professor at UCLA. “The danger we face at this fork in the road is the conventional wisdom that associates more regulation with better regulation and more restrictive policies with less risk. History teaches us that the opposite is usually true and that the costs of getting it wrong can last for decades.”

If Obama is to learn anything about the economy from the lessons of the Great Depression, let it be that government intervention is like sending a car mechanic to perform open-heart surgery.  The complications that arise will have long-term, catastrophic effects.

What better example of this than Fannie Mae—a product of the New Deal that is now at the heart of today’s economic problems.

The Libertarian Party and our members have been saying this from Day 1 of the economic crisis (and for many, many years before): Government is not the answer.

Our solution? Less is more.  That is, less government is more economic prosperity.

Essentially, get government out of the way so that the market can adjust.  This path will not be without its bumps and hardships, but it’s best for the long-term economic stability of the nation. What would have taken three or four years to fix through the market will now take at least a decade because of government intervention.

In the coming days of financial woe, and the coming years of the Obama administration, remember the lessons of history and challenge those around you to avoid continuing the myths of government effectiveness, especially when it comes to economic policy.

Live free,
Andrew Davis
Director of Communications
Libertarian Party

Amen to that.

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The Economics of Corporate Bailouts

The objectives of economic policy are to continuously improve the well-being of the largest possible number of people in society by making sure that the scarce resources available on earth are utilized so that every one’s most urgent needs are satisfied before less urgent ones are addressed.

When a business squanders factors of production which, from the consumers‘ point of view, would satisfy more urgent and/or ample needs in other lines of production, it operates at a loss. This sends a signal to the entrepreneur running the business to do one of the following, lest his operation contribute to a deterioration of the welfare of society:

– find a better use for the factors of production employed (produce different, more demanded goods)
– find more effective ways to employ them (increase the output of the factors employed)
– abort the operation, make the factors available to entrepreneurs who plan to employ them in more urgent lines of production, thus releasing them from their current occupation (declare bankruptcy)

Those are the choices he has under a capitalistic system on a market where the consumer, the common man, is supreme, a market based upon voluntary action. Any of these steps would swiftly remedy the misallocation of the resources and align them to the benefit of the common people, the consumers.

(Whether the workers employed in the business are paid market or union wages, they will easily be able to find a new, profitable, occupation at wages that are equal to or below the ones they are currently being paid. Overall, the consumers that the new employer sells to will benefit to the extent that the new workers contribute to a larger supply of valued and demanded goods. True, the individual worker may not be happy about the fact that he has to adjust and/or start off at a level that is slightly below his previous one. However, the people he produces for are workers, too. For the majority of the products produced in a capitalist society are produced for the common man. Everyone is now consumer, now producer, and would like to be favored in both roles. But there can be no other means of reconciling these conflicting interests than making sure that at any given point in time as many workers and other resources as possible are, from the consumers’ point of view, employed in the most urgent lines of production. The greatest harm is inflicted upon society as a whole if resources are withdrawn from these most urgent uses and occupied in less urgent, wasteful, operations.)

In an interventionist system, however, the entrepreneur who operates at a loss has another choice: He can petition with the government for a bailout. Under this arrangement, the government obtains additional tax money from the people under its governance territory and uses it in order to cover the losses generated by the business. It hence forces the people to restrict their consumption in order to keep up an operation that, from the their own point of view contributes to a lowering of their standard of living. It relieves the entrepreneur from the responsibility for this damage and lets the taxpayer, the consumers, shoulder it.

Alternatively the government can obtain the money by having the central bank produce it and make it available to it in a credit transaction. This would of course result in inflation and credit expansion, which again the consumer pays for in the form of prices that are higher than they would have been without the intervention (this could be rising prices, but it could also just mean prices that are dropping more slowly).

The government could also borrow the money in a credit transaction on the market, along with the implicit commitment to tax people in the future, meaning to forcefully take their money, in order to repay this debt. All this does is to shift the burden of restricted consumption into the future, while in the present withdrawing resources that capitalists may have employed for factors of production in profitable, and thus urgently demanded, operations, instead of loaning it to an entity that can simply repay by stealing it from others, and thus has no incentive to address consumer demands. This can be vividly witnessed in the fact that the money is made available to largely unprofitable businesses in a corporate bailout.

If unprofitable, in other words wasteful and less-urgently needed operations are subsidized while proper conduct is taxed and thus punished, it is only to be expected that more undesired behavior will be encouraged. Irresponsibility, short-sightedness, and imprudent conduct in business will the the inevitable outcomes over time.

Either way, such a policy of course necessitates a well planned and thought out propaganda and fear campaign before public approval will be granted.

The management style of the business will then in no way be a profit oriented one. If not already bureaucratic, it will become an inherently bureaucratic operation. But the bureaucratic style is precisely the opposite of what it needs. It needs to stop withdrawing resources from occupations where they could fulfill more urgent and ample needs from the consumers’ point of view.

But even from the business’s point of view there is no long term help for its employees and managers if its failed operation is bailed out. The bureaucracy and inherent lack of innovation will ultimately maneuver the business toward a devastating collapse which can no longer be justifiably funded out of tax money. All employees will lose their occupation. But since the failed operation went on for much longer than necessary, the bulk of the employees will be trained in ineffective, outdated, and unprofitable procedures. Now it will be even harder for them to adjust to the conditions on the market.

This holds true for any type of business, no matter what products and services it provides. Whether it builds cars or brokers credit transactions, the consumers’ judgment tells the entrepreneur whether they are supplied with the most urgently demanded goods or not.

The more resources the business employs, the more suppliers it purchases from, and the larger the loss, the more will the standard of living of the common people, the consumers, deteriorate, if the bailout intervention continues. Every single dollar appropriated would be better employed by the consumer it is forcefully taken from. Every dollar used to obliterate the loss is misspent. The larger the business that is being bailed out, the more immediate harm is inflicted upon the common man.

Thus, there is nothing that could be farther from the truth than the argument that some corporations are too big to fail. It is hard to find a more sinister and callous consumer scam perpetrated upon the populace than the corporate bailout. It adversely affects the standard of living of the common man, who is consumer, taxpayer and worker at the same time, and on top of that leaves the employees of the business poorly trained and inflexible once the inevitable collapse occurs.

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Antitrust and Monopolies

The Objectives of Antitrust Intervention

Public opinion believes that the societal apparatus of compulsion and coercion, the government, should protect individuals from monopolies: Monopolies restrict the supply of products and harm the welfare of the common man. The government has to step in and put and end to this injustice. Its intervention is supposed to foster free enterprise and fair competition and protect the poor and hapless from powerful corporations.

The term monopoly needs to be defined more precisely here. There are two types of monopolies which have completely different implications.

The supporter of antitrust enforcement by the government does not make a distinction between the two and hence arrives at flawed conclusions.

There are the Coercive Monopoly and the Market Monopoly.

The Coercive Monopoly is a business which is protected from competition by the government. It is not the monopoly that needs to be discussed here. It is, indeed, a monopoly that harms the consumers and benefits those who are protected. All that would need to happen to end this type of monopoly would be for the government to withdraw itself.

The type of monopoly in question is the ‘Market Monopoly’: Antitrust proponents claim that an unhampered free market produces market monopolies and that it is the government’s job to prevent this from happening.

The Market Monopoly

The market monopoly is a business that operates on a voluntary market. A business in that environment is comprised of a group of people that jointly works towards withdrawing factors of production (raw materials, labor, etc.) from the market in voluntary contracts, and combines them in lines of production where they create goods that are, from the consumer‘s point of view, worth more than where the factors were employed prior to withdrawal, aiming for an entrepreneurial profit.

This in itself is nothing but the schoolbook definition of a business on the free market, seeking to make a profit. The particular thing about a business that holds a market monopoly is that there is no other one that sells the same good.

But this does not change the fact that, based upon the law of marginal value preference, the market monopoly business has to set its price based upon consumer response. It cannot charge an infinite price for its goods. It also does not change the fact that it has to produce a useful product that satisfies a consumer demand. It also does not change the fact that this whole process is completely voluntary and peaceful on the part of the seller, as well as on the part of the buyer. It also does not change the fact that capitalists always stand ready to provide capital to entrepreneurs who are completely free at any time to identify cheaper processes and sell at cheaper prices and/or better quality, outstripping the previous monopoly, and ultimately reaping a profit to satisfy the profit-seeking capitalists, while at the same time improving the consumer’s situation.

Yet, for the sake of the antitrust proponents’ argument, we shall pass in silence all these facts and inquire as to what effects the government’s antitrust intervention will have regardless.

The Antitrust Intervention

What antitrust proponents now ultimately suggest is that the government decree a maximum number of goods to be sold by this monopoly business, and step in with police force if the business dares to satisfy more consumers than allowed by its decree. The fact that the business, as well as the consumers, are merely acting voluntarily towards what they consider to be their best choice, does not interest the antitrust proponents: In their minds, the fact that the people, in their role as consumers with every penny and every dollar, are casting a conscious vote, by choosing to purchase the product they seek, is a mere expression of the ignorance and the gullibility on the part of the public. The government is omniscient, its will supreme. Its decree has to be followed and enforced when violated. How dare the consumers make the decision who to buy from!

The government employs market share statistics, based on the revenue generated from the products in question. It decrees, for example, that company XYZ, is not allowed to sell more than the equivalent of 40% market share worth of its, say, operating system software ABC. Why exactly 40%? Why not 39.95% Why not 40.1%? The approach is, without the slightest doubt, completely arbitrary.

The Consequences of Antitrust Intervention

After the government steps in and limits the supply of the goods in question, who ultimately suffers? The marginal consumers, who would have purchased the additional unit of the product whose supply has been cut off. The objective of protecting the average consumer from overpriced or bad products obviously fails. In fact, the policy attains the exact opposite.

After the government has intervened, sooner or later a new entrepreneur will step in and fill the gap with a similar good. However, he will not be under any pressure from from the previous market monopoly company. He merely stepped in to fill the gap, because the police intervened and outlawed by aggression any more sales from the market monopoly business. At this point, his position is not threatened at all. Due to his inexperience and lack of competitive pressure, his goods will most likely be inferior and more expensive than the previous market monopoly’s goods. It will take him much longer to get to a point where his product can measure up to the previous market monopoly business’s product. Economies of scale will set in at a much later stage for this entrepreneur, so as he increases production, his prices will not drop as fast as previously. Marginal consumers will have to do with his inferior, higher priced product.

The fact that a new entrepreneur steps in to fill the gap will not in the slightest make the market more competitive or fair. Quite the opposite: The coercive intervention creates a less competitive environment with less competitive pressure for the new business, since it doesn’t have to fear competition from the previous market monopoly business, and the consumers ultimately suffer.

The intervention sends out the message that as an entrepreneur you shouldn’t strive for perfection when selling to consumers. For if your product becomes too popular your output might be restricted by the government.

Furthermore, it encourages the entrepreneur to attain a good standing in government, and thus to allocate funds toward bribing the politically connected in the form of campaign contributions, rather than invest in factors of production that would increase the output of consumer goods in the future.

Thus the policy doesn’t help the consumer at all and is bound to fail at attaining the stated objective.

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