Encroaching Government, Flagging Economy

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In his Principles of Political Economy, 19th century economist John Stuart Mill wrote that the "only insecurity which is altogether paralyzing to the active energies of producers, is that arising from government, or from persons invested with its authority." Mills words ring particularly true in light of the excellent reporting in the February 26th edition of the Wall Street Journal. Arguably even the most sympathetic among us when it comes to the size of government would have been surprised to learn of the myriad ways federal agencies are confidently encroaching on the turf of private economic interests.

On the front page the reader was met with the large headline, “U.S. Pushes Sovereign Funds To Open to Outside Scrutiny.” Sovereign wealth funds (SWFs) are of course government-sponsored overseas investment entities, and it might be logical to assume that private U.S. firms, perhaps eager to protect the shareholders at whose pleasure they serve, are eager for those placing capital with them to be less opaque. Not very likely. In truth, it is the U.S. Treasury, “seeking to head off a political backlash” from Washington, that is looking to foster greater government oversight of foreign investment funds.

The above is interesting on two levels. First off, dollar mismanagement by our own federal minders was the likely miscreant when we consider investment distortions that led to big losses for U.S. banks, and which necessitated foreign investment. Secondly, with those private banks ever striving to please fickle shareholders, it seems they would be most qualified to sniff out investment of a sinister nature. And if not, outside investment that proves enervating for one company merely creates the opportunity for another firm to fill the market void.

Down from the SWF article was the headline, “States Draw Fire for Pitching Citizens On Private Long-Term Care Insurance.” Last year California governor Arnold Schwarzenegger sent out six million letters to mid and lower income Californians in hopes of getting them to purchase insurance for the aged, and states from New York to Pennsylvania to Nebraska are doing much the same. Nebraska governor Dave Heineman went so far as to name last November “long-term care partnership awareness month.”

What the various healthcare-minded politicians didn't comment on was if something like this is so useful to the citizenry, why would government officials need to tell them about it? The answer is of course explained by the truth that government on the federal and state level has already heavily inserted itself into the delivery of healthcare. With states facing high future costs related to Medicaid, those same states “are now promoting long-term care policies under marketing partnerships with the insurance industry.”

If they were searching for a governmental trifecta on the Journal’s front page, readers noticed that federal prosecutors convicted five insurance executives for facilitating “fraudulent transactions between American International Group Inc. and General Re Corp.” Federal prosecutors say “they plan to ‘work up the ladder’ seeking more indictments,” and without commenting on the merits of the prosecution, it seems fair to ask if we need government officials to eradicate fraud? At first glance many would say yes, but then the aforementioned verdict stems from “one of the highest-profile fraud cases to emerge from the accounting investigations that rocked Wall Street following the collapses of Enron Corp. and WorldCom Inc.” About the latter, it should be remembered that investors, as opposed to government regulators, revealed the fraud, not to mention that investors are surely compensated for malfeasance in the executive suite through stock risk premiums that lower the costs of shares purchased.

Turning to A2, readers were met with the headline, “FDIC to Add Staff as Bank Failures Loom.” The Federal Deposit Insurance Corp. (FDIC) of course insures depositors against bank failures, which in layman’s terms means it privatizes bank successes, all the while socializing bank failures. To shore up staff, the governmental body will add former employees that helped handle the S&L implosions of the ‘80s and ‘90s.

Former FDIC chairman William Isaac was quoted in the article, and without irony he said that bringing back those employees who weathered the last S&L debacle is “very smart.” What he deems smart is something the electorate should be wary of. Taxpayers will now be on the hook to insure the mistakes of the very bureaucrats who enabled the last S&L crash.

Moving to A3, there was a headline stating, “Deal Nears to Curb Home-Appraisal Abuse.” One might assume such a deal would have been reached between private economic interests eager to achieve more accurate price discovery when it comes to housing. The assumption would be wrong. Instead, government-sponsored mortgage giants Fannie Mae and Freddie Mac are near a deal with New York attorney general Andrew Cuomo “to make changes meant to discourage inflated appraisals.”

The above activities would surely be anathema to libertarian-minded people in our midst, but then the both the housing and mortgage industries are very much the supplicants of the federal government through tax-deductible interest payments on loans, preferential capital-gains treatment on home sales, and of course, Fannie Mae and Freddie Mac; two entities implicitly backed by taxpayers and who are supposedly necessary to maintain a liquid mortgage market. So rather than allowing private markets to solve any problems related to home appraisal, the deal means “two government-sponsored companies” will “require lenders they work with nationwide to change their appraisal practices.”

Down from the above-mentioned article, but on the same page was the headline, “Food Companies Become Frustrated With Meat Recall.” The companies included Wal-Mart, Costco, Burger King and McDonald’s. Rational minds might think that owing to the desire of each company to maintain a customer base that accesses its foods with a high degree of regularity, there would be no need for government oversight here. Wrong again. Instead, the USDA is forcing each private concern to recall meat that internal analysis suggests is safe. The USDA is not budging on its recall, which means its implacable stance “could cost food makers hundreds of millions of dollars and result in some small meat companies going out of business.”

On to page A12, there was a related headline, “Rice and U.S. Beef Lobbyist Offer Reassurance in Seoul.” Within the article readers learned that the “largest food recall in U.S. history is reverberating abroad, and the White House is helping the meat industry counter the fallout in an important Asian market.” Secretary of State Condoleezza Rice and her entourage will seek to revive the U.S.-South Korea free-trade pact, though the unseen here is how protectionist interests in Washington had previously created the barriers to trade that would make such a pact necessary.

All of which led to page A17, the one that precedes the Journal’s editorial section; a section that happily decries government involvement in private commerce on a daily basis. It is on the preceding page that readers saw a small article in which they learned that Fed Governor Frederic Mishkin would like policy makers to “focus on core inflation that excludes food and energy prices when the economy faces an oil-price shock.” Despite the certainty that private interests are much better suited to price market goods, Americans accept without protest a federal body intent on using its rate mechanism to target the prices of that which we buy.

But what’s even more remarkable here is that a Fed governor would talk about oil shocks without noting the certain truth that every single “shock” since 1971 has been the result of a declining dollar. Indeed, as evidenced by the previous examples, we see that the federal government seeks to insert itself into all manner of commerce, but when it comes to the dollar, a currency that is monopoly issued by the Federal Reserve, the latter regularly shirks its duties when it comes to issuing a currency that is stable in value.

In writing about the paralyzing nature of government, J.S. Mill went on to say that it is when those in power seek to relieve the "population from much of the former insecurity" wrought by freedom that formerly productive people become “enervated and impoverished." If Mills were alive today, and if he were to have picked up the February 26th Wall Street Journal, it’s fair to assume that he would have been shocked by the high level of government involvement when it comes to commercial matters, and that the latter would have led him to reiterate his views on what the encroachment’s impact would mean for our future economic health.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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