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Economic Progress and the Role of Government – Interesting Thoughts
By JLP | November 20, 2008
The other night I could sleep so I got up, looked through my books, picked up Common Sense Economics
Page 77 of the book contains a list titled Ten Elements of Clear Thinking About Economic Progress and the Role of Government:
1. Government promotes economic progress by protecting the rights of individuals and supplying goods that cannot be provided through markets.
2. Government is not a corrective device.
3. The costs of government are not only taxes.
4. Unless restrained by constitutional rules, special-interest groups will use the democratic political precess to fleece taxpayers and consumers.
5. Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.
6. Goverment slows economic progress when it becomes heavily involved in trying to help some people at the expense of others.
7. The costs of government income transfers are far greater than the net gain to the intended beneficiaries.
8. Central planning replaces markets with politics, which wastes resources and retards economic progress.
9. Competition is just as important in government as in markets.
10. Constitutional rules that bring the political process and sound economics into harmony will promote economic progress.
While reading through those ten items I couldn’t help but think about the situation we’re in as a country. It seems we have violated (or are about to violate) nearly every one elements listed above.
I was curious to see what the one of the books authors, James Gwartney, thought about the credit crisis and the potential bailout of the big three so I sent him an email. This is his response:
I do not believe that political decision-making is good at directing resources toward productive activities and away from counter-productive ones. Thus, substitution of Congressional votes for the profit and loss system will almost surely reduce the income of Americans.
With regard to the recent upheval in credit markets, several factors played a key role. The regulations imposed by HUD on Fannie Mae and Freddie Mac during 1995 an 1999 mandated an expansion in credit to those with lower incomes and reduced the required down payments for that credit. Along with the short-term low interest rate policies of the Fed during 2002-2004, this led to an increase in demand for housing, the housing boom and eventually the higher mortgage default rates and the housing bust. A 2004 regulatory change permitting mortgage banks to leverage their equity by a larger amount also played a role.
It was not a good idea to bail out Wall Street bankers and it is not a good idea to bail out inefficient auto producers. If we do so, state governments (California, New York, and others) will be right behind asking for a bail out. So will other industries (e.g. airlines and construction) currently experiencing difficult times. Business executives will be spending more time in Washington seeking favors and less time focusing on the production of quality goods and making them available at economical prices. This is not the recipe for long-term growth and economic progress.
We are currently coming off of a spending binge financed by debt, including both government and household debt. The solution is to cut back on spending and increase our saving. Part 4 of Common Sense Economics
These are difficult times and few people understand what is going on. As we noted in the preface of CSE, a nation of economic illiterates is unlikely to follow policies conducive with future prosperity. Best wishes with your work to improve the economic literacy of Americans.
Jim Gwartney
Why can’t we get people like this in Washington? Or, why can’t we get the people in Washington to listen to people like this?
Thanks to Dr. Gwartney for taking the time to respond to my email and giving me permission to post it here on AFM.
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Topics: Books, Economics | 13 Comments »
November 20th, 2008 at 3:15 pm
I am suspicious of those who support these “elements” unless they are specifically libertarian.
For example, it is common for supporters to endorse curtailing the rights of individuals for the collective benefit of property owners.
I believe that once government strays from laissez-faire principles, it creates winners and losers and thereby creates grievances and corresponding moral and political claims for redress.
November 20th, 2008 at 3:29 pm
Luckily we will have a leader like this in washington very soon. Barack Obama will fix this country.
November 20th, 2008 at 3:36 pm
Daniel,
Then he would be going against everything he campaigned on.
Both parties have gone away from these principles. That’s why we are in this situation. Both parties are guilty.
November 20th, 2008 at 3:37 pm
Boomer,
Good observation!
November 20th, 2008 at 5:59 pm
“Those who advocate robbing Peter to pay Paul can always count on the support of Paul.”
It occurs to me that if the government starts bailing out every industry and all the middle class Americans, then who exactly is going to be picking up the check? Who is Peter?
As to this issue, if the three names on the bill were “Exxon, Mobil, and Conoco” instead of “GM, Ford, and Chrystler” do you think the politicians would be willing to sign it? They didn’t help the oil industry in the 80’s when it literally collapsed, nor did they help all the people in retail and other industries who lost their jobs as the oil workers went bust. Real estate came to a standstill and unemployment spiked in Louisiana, Texas, and other areas. No federal bailouts there, and everybody recovered – and for the better.
Besides which, everything the government touches turns to absolute crap. Bailouts and subsidies stop the bleeding temporarily, and they artificially inflate economies which will ultimately come down a lot harder (consider the auto industry, or real estate, or our educational system – local and university, or healthcare…).
A freer market with limited government subsidies over the last few decades would have stifled some of the boom but allowed all these industries to compete internationally (like automakers) and stay efficient (real estate) and cause prices to stay within the reach of the average consumer (university & medical costs).
November 20th, 2008 at 11:02 pm
Meg, I have to question a couple of opinions. The first one is “everything the government touches turns to absolute crap. ” Obviously,in this economical downturn, lots of people nearing retirement are somewhat glad that their Social Security is not invested in the market- at least some of their future retirement income is secure. Remember how many “experts” wanted to privatize it.
Second, you stated that downturns have occur and everybody recover for the better. As some prosper, others have become invisible. I mean the urban areas in almost all of the states is where the jobs and wealth is concentrated, which
may be how free markets operate. I agree with your last statement but sometimes as a country we have lost that balance which may make this downturn worse than others we have experience.
November 21st, 2008 at 5:50 am
@ Anonymous – If Social Security is your idea of a government success story then I’ve got lots of real estate deals for you here in Detroit. What you fail to realize is that for those people “nearing retirement” they would be infinitely better off IF their Social Security money (including the employer half) had been invested in the market over the past 30-40 years even with the recent sharp decline. Heck, they’d be better off even if the money had been invested in government bonds, money market funds, or stuffed in a mattress at home. Social Security is a lousy investment that can’t even keep up with inflation! How is that secure? It may be socialist but it’s not security. And don’t even bring up Medicare.
The fact is, Meg is 100% correct that everything the government touches turns to crap.
@ JLP – Yes, both parties have strayed from these principles. However, one particular party has made the dismantling of the Constitution and the destruction of our economy its basic platform in pursuit of a socialist agenda for the last 70 years. Said party will soon control everything in Washington DC and will continue to do so until the other party rediscovers its spine and returns to these “ten elements” among other things. Until then, welcome back to the Carter years.
November 21st, 2008 at 9:38 am
I think this is the book we should use for a discussion group!
November 21st, 2008 at 9:58 am
Unfortunately, John Maynard Keynes still lives and breathes, although he may be on life support.
November 21st, 2008 at 11:06 am
@Steve- Maybe I am older than you but when I grew up retirement income was compare to a three legged stool consisting of social security(capital preservation), pension(capital preservation), and savings(capital appreciation) which could include real estate, stocks, and bonds. 401k plans replace
pensions and I would consider it a capital appreciation type plan which is probably a good thing. However, the point I was trying to make is with the market acting like a casino those nearing retirement are glad that some of their money is in a capital preservation type plans which includes Social Security and savings like CDs and money market funds. Yes, the last thirty or forty years of investing in the market probably would of produce more wealth and independence(but we did not know that) for
our citizens but judging from from surveys that people invest too conservatively and add that past performance will not predict future results.
I think that Social Security has been a successful program run by our government. Personally, I know people who manage to get by on Social Security and savings. Yet, will Social Security be there for the younger generation
as part of the three legged stool I can not honestly answer that.
November 21st, 2008 at 9:22 pm
The reason that people in Washington can’t listen to people like this is that government in this country is bought and sold by special interest groups. The Democrats are pretty much owned by the unions, and the Republicans are pretty much owned by big business interests… who cares for the little guy? Don’t bother answering, that was a rhetorical question…
November 23rd, 2008 at 8:44 pm
I think Meg is on to our bloated government. When the IRS took over the Mustang Bridge Ranch, a legal bordello in Nevada, for non-payment of taxes, they managed to run it into the ground with in a year. If government manages to screw up a place that sells sex and booze…
November 24th, 2008 at 9:44 pm
Heroic post JLP. I agree with everything you listed and the author’s email. Unfortunately, I think numbers 4 & 5 explain a lot of our problems with our government.
Keep up the good work!