Government Solutions Are Slowing the Economy

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A recent newspaper headline asked a question that’s presently on the minds of many Americans: “How long will the economic plunge go on?” Depending on the person answering the question, one might among other things hear “when taxes are reduced” or “when housing recovers.” Both answers are surely appealing, but then it’s also true that the U.S. economy has boomed with tax rates much higher than those at present, not to mention that even in its weakened state, prices today point to a housing market better than the one Americans experienced when this decade began.

Perhaps a better question to ask might be what the federal government is doing right now to make the economy worse, or what the government could stop doing so that the economy starts growing again. In this case, the answers to our present economic difficulties are many.

At first blush it should be said that economies grow when the ideas of entrepreneurs are matched with capital. Joseph Schumpeter wrote that entrepreneurs “disrupt”, but in order for them to do so they must first have access to existing economic assets in order to render them more productive.

When we consider the above, it’s fair to say that the federal government’s present proclivity to bail out anything and everything is anti-entrepreneur. Indeed, it is when companies are allowed to fail that the intrepid among us are able to snap up human and physical assets on the cheap in order to deploy them more profitably. So the first positive step from our federal minders would be for them to let markets reward the winners, all the while allowing the failed commercial combinations to go out of business.

Outgoing Treasury Secretary Henry Paulson seems to reinvent the Troubled Assets Relief Program (TARP) on a daily basis, but one of his foremost desires remains a reflation of sagging banks. In this instance he would like them to issue more credit cards so that individuals start consuming again. This sounds intriguing at first glance, but then economies never lack consumption so long as there is production. Bringing the entrepreneur into the equation once again, if TARP is tied to aiding the flagging consumer, eager new business entrants will suffer on the margin for capital being consumed rather than loaned to them with future growth in mind.

On the housing front, there’s seemingly a bipartisan consensus among economists that a healthy housing market is the path to our economic resurgence. The thinking here is backwards. A vibrant housing market doesn’t so much grow the economy as it’s the consumptive result of an otherwise productive commercial setting. Simply put, strong property markets in New York City and San Francisco aren’t the driver of either economy; instead the housing markets in both are the fortunate result of robust economic activity in both cities.

So when the federal government seeks to use monies taxed or raised from the private sector in order to reduce mortgage rates and mortgage payments, it is in fact authoring our economy’s continued decline. This is surely the case if we yet again put the entrepreneur at the center of any presumed economic reawakening. To the extent that the government is reorienting capital away from the innovative sector, there is surely a smaller pool of capital available for innovators to bid for.

But perhaps the most paralyzing governmental activities when it comes to future growth are the efforts being made by the Treasury and the Federal Reserve to ease what many deem a “credit crunch.” When markets tighten with regard to credit, this is an essential market signal telling sidelined investors that returns will be high for the investor willing to take big risks.

In the above sense, start-ups in Newark (NJ) and East St. Louis regularly face tight credit conditions, but at the same time courageous investors are frequently rewarded for taking those risks. To the extent that rates of interest are presently high even for what many would consider safe investments, it’s essential that the rate signals be true as a way of attracting the very capital and growth that will eventually bring borrowing rates down once again.

While difficult credit conditions right now might paint a bleak picture for entrepreneurs, even worse for the latter is the process whereby the federal government blurs the price of credit, and in doing, drives investors away altogether. Capitalism is in the end reliant on the efficient deployment of capital, and when the blunt hand of government distorts this process, the certain result is less capital for all manner of new business entrants.

Schumpeter ultimately made plain that without access to capital, the entrepreneur “cannot become an entrepreneur.” And so as long as the federal government expropriates capital while distorting the market for same, the agents of growth eager to divert down-and-out assets to higher uses will lie in wait. In short, the answer to these difficult times isn’t more government, but instead a humble government that simply allows producers to produce.

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