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Government Should Intervene Less during Economic Crisis

In last week’s opinion column (“Three Myths About the President’s Budget”), David A. Weinberg says, referring to the increase in federal spending, that “the undisputed cause of this jump is the federal effort to save our economy.” This is not true.

The TARP and the Stabilization Efforts program account for only half of the increase in the federal budget. The other half is explained by sharp spending increases in: (1) Social Security, (2) Medicare, (3) Medicaid and (4) Other Social Programs (+8%, +10%, +29% and +64% respectively!). In fact, if we take away the TARP we see that the federal spending still increases by 25%! This is unprecedented, by any measure.

But the real problem is that, unlike Mr. Weinberg’s undisputable items (the TARP and Stabilization Effort), these increases are permanent and, what is more, they are funded with tax increases on corporations and wealthier Americans. These tax increases may satisfy the envy of all those class warfare junkies, but they will certainly not increase investment. And lower investment is a recipe for lower economic growth. And that is undisputable.

Whether this and the bank and car industry nationalization are socialism I don’t know, but they are certainly not free market initiatives. Mr. Weinberg seems to have no problem with that anyway, as he says, “free market isn’t the answer to everything.”

I have been hearing this everywhere, in the classroom, in the media, in politics and even among economists. But let’s get something straight. This crisis was created by excessive government intervention. And by excessive intervention I mean the $6 trillion that Fannie and Freddie pumped into the residential housing market. They were able to do this because government support gave them access to preferential capital requirement and cheap debt. If the government had not backed these GSEs they would have never been able to inject such monstrous amounts of cash into the residential housing market and we would have had no housing bubble.

So now, after excessive government intervention created the housing mess, we are told that more spending, more regulation, and less free market will fix it. I don’t buy that.

But let’s not forget that the market is nothing more than the sum of all our decisions. In fact, the market is the most advanced form of democracy. Instead of voting every two years or so, you vote every day with your dollars. With this market voting system, a company that fails to deliver is immediately punished with a reduction in sales. You cannot say the same of state run services. Free market has also another beautiful feature; bankruptcy. A failing company can be disbanded, brought to court and its managers can be put in jail. The company’s assets are then taken over by more efficient companies and the whole system is healthier. You cannot do this with government run services.

Free market is a prerequisite for democracy, and, just like democracy, free market is the worst system, with the exception of all the others.

Alejandro Rogers G