Economic Statism

This is completely opposite of the predominant meme these days, but I am firmly in the camp that government should not be meddling in the affairs of the economy - neither in bad times, nor in good.

In the last 100 years, the government has so slowly inserted itself into economic affairs that at my age (36) it almost seems hard to imagine it could be different. And there is no end in sight. And it is getting worse.

But I firmly believe that the government is to blame for the magnitude of the problems we are currently seeing in the economy. Not just the magnitude, but even the ultimate causes.

What I believe, and I don't think others understand or take into consideration, is that this isn't even so much an issue of good intentions or bad intentions. Several things done with good intentions have disasterous affects. It's not enough to have good intentions.

So not only do I think that government is to blame for where we are, but that is compounded by the fact that now more and more people lean in the direction that it is goverment that will get us through it. More good intentions. More bad results.

Our President-elect, in fact, has said that it is only Government that can get us out of the mess we are in. Some of the things that will be proposed, will no doubt make some sense. But on the whole I think the government has us on a slippery slope aimed at the ground.

It is important to realize that economics exists independent of government. The laws of economics are based on the actions of a complex system of millions of entities (people and businesses) that even if you try to control cannot be. That is why "black markets" for goods and services are created in places where control is attempted. Economic principles exist independent of government mandate - which is why trying to manipulate outcomes leads to problems. You could say it this way - government can control economies, but not economics. Reality always comes back to bite you in the ass when you turn your back on it.

Case in point - the "Great Depression" was precipitated by a disasterous managing of interest rates by the Fed. This was done politically, to prop up the British Pound, which was attempting to maintain a level pre-WWI strength peg to gold, which its post-war economy couldn't maintain. But economics can't be controlled. This led to overly-loose credit, which fuelled massive overconsumption, which was unsustainable and led to the crash and depression.

Sounds familiar. In 2004 or so I clearly remember a cover of The Economist magazine dedicated to the fact that the Fed was afraid of deflation and would be slashing rates. This led to already-overly-loose credit markets becoming even more so, which fuelled massive overconsumption, and well you see where this is going.

Not satisfied with having caused the problems back in 1929, the government then became part of the problem in making the depression last as long as it did. In fact, when "The Fed" was created in 19-something-teen, it was to try and make recessions shallower. And yet the recessions after the Feds creation were deeper, culminating of course, in 1929 and the miserable 1930's.

I say all of that even though I'm getting sick of the media and politicians invoking the depression in comparison to current conditions. The reality is that the conditions are nowhere near the depression.

This has been called by many, including President-elect Obama, the "worst economic crisis since the depression."But this is an outright lie. The recessions in the 1970's and 1980's were worse than this, on objective measures. Could it become worse? Of course - and it will be a self-fulfilling prophesy - because it will be the government's actions that will get us there.

But most will believe what government tells them. That the "free market" has failed and it is now time for government to take more control.

And there's the issue. This wasn't a country founded on the principle of control. It was founded on the philosophy of liberty. And especially in the last 100 years we've moved farther and farther away from that. Many times the side-effect of things done with good intentions.

The worst thing about the current thinking is that it is failing to draw the right lessons from what we've seen unfold over the last year. Many people are probably learning the right lessons actually, but it makes the government flail.

The lesson to draw is that debt has to be managed rationally. There are levels at which consumption is not sustainable - and, on average, we blew through those levels up until 2008. If anything, Government should be preaching *that* message.

The economy can grow again, and sooner, if government gets out of the way. Don't prop up failing companies and claim that it is saving an industry. Don't make future generations bail us out of the mess we're in now (by massive deficit spending). The bottom line is that government doesn't create jobs, businessmen do.

We're definitely headed toward more pain, courtesy of the government.

The worst signs are this:

* Even though the majority of Americans were against the TARP bailout bill, congress passed it anyway. The House temporarily had some balls, but they sold out fairly quickly.

* Even though the majority of Americans were against an "auto bailout", and even though congress didn't pass an "auto bailout", the executive branch still performed an "auto bailout".

The positive signs in this were that a majority of Americans were against both of these things. But that didn't stop the government of course. And it won't stop them going forward.

Worse still, a charismatic leader will be better able to convince a majority that increased economic statism is in their best interest.

And on it goes.