Market Wisdom Replaced By Political Force
Last week the federal government closed a chapter on the auto bailout when the Treasury Department announced that it had sold the last of its stake in General Motors. The full ramifications of this unprecedented market intervention, however, remain unknown. While critics note taxpayers lost $10 billion in this investment, the White House heralds one million saved jobs. Lost in the debate over the effectiveness of this single effort at stimulus is a larger point that government intrusion has lasting impacts on private markets well beyond the story of the day.
In competitive and open markets, price represents the level at which a buyer and seller agree to transact. More than defining a private bargain, price confers a significant informational benefit. Market firms rely on price signals to make decisions as fundamental as employing and utilizing personnel, and whether - and how - to bring goods or services to market. A robust price functions as a natural correction mechanism. But, when the price signal proves unreliable or artificial, markets become distorted, and shortages or surpluses result.
Today's policymakers have shown a great inclination to disrupt the natural functioning of markets in the name of stimulus. While much has been written about the "efficacy" of individual programs, less attention has been paid to the long-term consequences of compromising the reliability of price signals. Meanwhile, by emergency tactic or increased regulation, the federal government has meddled in the markets for housing, energy, education, investments and health care. Such intrusions are often born of the short-term thinking that accompanies crises and a mentality best articulated by George Bush's statement that he "abandoned free market principles to save the free market system." Other interventions are more goal-oriented prescriptions, such as then-presidential candidate Barack Obama's suggestion that he could, "create a market" for carbon emissions.
These market intrusions contradict the philosophy of Adam Smith that self-interest and the natural desire of all to improve their own condition are preferable to the incompetence of government in economic matters. And, when market participants are left to make decisions based on compromised price information, malinvestment often follows.
In housing policy, government guarantees provided the illusion of affordability. Instead, attempts to spur home ownership left taxpayers burdened with the opaque and sizable obligations of Freddie Mac and Fannie Mae, and compromised sound underwriting practices, while increasing default rates. Ultimately, few low-income families encouraged into homes through government intervention found the experience as pleasing as advertised.
Government policy has disturbed energy markets with mandates, taxes, spending, loan guarantees, tariffs and regulations. In addressing global climate change, policymakers have sought to implement a variety of schemes with the unapologetic aim of price manipulation in order to favor preferred forms of energy. Attempts to label such a regime as "market-based" is simply not credible.
The government's enthusiastic extension of loans to students, while improving lower- and middle-class access to higher education, has significantly distorted the market and saddled a generation of Americans with higher costs. For too many, their debt-financed education represents a stifling encumbrance instead of the great investment that society's collective commonsense has long suggested.
Many have credited quantitative easing with avoiding a depression. Fewer address the inconvenient fact that, as a result, more than 70% of the world's gross bond issuance is now being openly monetized. And, if United States Treasuries are distorted in price, the price signal for the entire fixed income complex is untethered. The quality of equity prices is also compromised in a world awash with government-injected liquidity. Proof of this distortion is a stock market that increasingly responds to tapering expectations. Market watchers have once again taken to calling Fed policy intervention, "the punchbowl."
Our two major payment mechanisms for health care delivery are government programs (such as Medicare and Medicaid) and the private insurance market. In the government market, prices are largely dictated by government fiat. The private employer-based market provides workers an exclusion from income equal to the value of their health care benefits. Either way, the structure has long hidden the real cost (or price) of the good or service consumed. The debate over health care reform offered an opportunity to bring greater clarity to health insurance pricing. Instead, the Affordable Care Act provides another example of the confusion that follows the substitution of bureaucratic decision-making for the wisdom of crowds. If Healthcare.gov ever works as promised, consumers will be farther away from understanding the cost of the services they are consuming than ever before.
In the end, the obfuscation of price signals through overzealous regulation or emergency tactic will always prove unsatisfactory for market participants. Over time, policymakers and regulators too will likely become frustrated in efforts to understand markets that they have already manipulated. Government interference should be limited to supporting a stable and predictable marketplace that encourages private decision-making. Otherwise, the wisdom of markets is replaced by the whims of those serving up the punch.
Frank J. Macchiarola is a Senior Principal at Bracewell & Giuliani LLP. He served as Republican Staff Director of the US Senate Committee on Health, Education, Labor and Pensions Committee from 2009-2013, and Republican Staff Director of the US Senate Committee on Energy and Natural Resources from 2006-2009.
Michael C. Macchiarola is a Managing Director at Equinox Financial Solutions and has taught law and finance at City University of New York, Seton Hall Law School and St. Francis College.