Economics

The Government's Economic Impotency

Politicians who presume to guide the economy have no idea what they're doing.

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It should finally have dawned on the American people that the politicians who presume to guide the economy have no bloody idea what they're doing. We're long past the time when knowledge of economics was required to see that the government is impotent when it comes to creating economic recovery. If you want evidence of that impotence, just look around.

Governments are very good at creating recessions and at impeding recovery. That is the limit of their powers. If you expect something constructive, you'll be disappointed. Politicians from President Obama on down will promise the moon, but they will deliver only worthless rocks. They will blame everything and everyone for their failures, but their inability to succeed has one source only: the political process—which is founded on force, not peaceful economic cooperation—is singularly inappropriate for creating prosperity.

Between them, Obama and former president George W. Bush directed over a trillion dollars in spending increases and tax cuts toward stimulating the economy. What's to show for it? A persistent and understated 8.2 percent unemployment rate. If you count the part-time workers who'd rather be full-time, the rate is 14.8 percent. Even that statistic hides a woefully depressed labor-participation rate: under 64 percent. You have to go back to 1981 to find such a low rate. The irony is that people who drop out of the work force in frustration aren't counted among the unemployed.

The politicians' approach is flawed at its most basic level. Almost without exception, they promise to "get the economy moving," as though it were a stalled vehicle. Popular metaphors aside, the economy is not machinery subject to stimulus. It is motivated people engaging in continuous exchanges for mutual benefit.

People make exchanges and investment decisions—or refrain from doing so—on the basis, not only of their values and preferences, but also of their expectations about an inherently uncertain future. These expectations can be clouded or changed by additional uncertainty about what an erratic government will do next, which economic historian Robert Higgs calls "regime uncertainty." People are less likely to make bold, long-term business decisions, the kind that create jobs and new and better products, if a new tax or regulation—perhaps unveiled next week, next month, or next year—could wipe out a plan's potential to turn a profit. The world is uncertain enough without having to worry about what harebrained scheme inherently ignorant politicians will think up next.

With regulations on employer-based health insurance, finance, and other matters still to be written, with the Federal Reserve run on the basis of whim, an entrepreneur would be taking a huge risk in undertaking any long-term project. Moreover, with a $15 trillion national debt looming, who knows what tax plan Congress and the president might cook up?

That's enough to account for the lackluster recovery, if it deserves to be called even that. Yet most pundits, having absorbed vulgar Keynesian economics from teachers and cable-television "authorities," believe the flaw is in the market process, not the political process—hence their view that if the government would just spend enough borrowed money, all would be well. Spend it how? This is where the incantation "infrastructure" comes in. Repair the roads, bridges, and schools, and unemployment will disappear. Hire the idle construction workers, pay them to do this work, then watch them spend that money and put other people to work. It's so simple. Government must think big!

It may seem plausible, but it's wrong. Every penny the government borrows or taxes must first be removed from private purposes. Government is a parasitic organization with no resources of its own, no power of its own to produce. So where's the gain?

The Keynesians respond that people in the private sector aren't spending. But that has already been explained: regime uncertainty. And it's not true that people aren't spending on consumption. What is lacking is investment. But what investment requires, besides confidence, is savings—which government and the Fed discourage through artificially low interest rates.

We must stop looking to politicians for recovery. The path to prosperity is government retrenchment: the elimination of taxes, regulations, government spending, corporate privileges, and all other barriers to social cooperation.

Sheldon Richman is senior fellow at The Future of Freedom Foundation in Fairfax, Va., author of Tethered Citizens: Time to Repeal the Welfare State, and editor of The Freeman magazine. This article originally appeared at The Future of Freedom Foundation.

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  1. Excellent article, Mr. Richman.

    1. I agree. One of the better articles I’ve read on reason.com. As an anarcho-capitalist an austrian econ fan I look fwd to more articles from you.

  2. We’re long past the time when knowledge of economics was required to see that the government is impotent when it comes to creating economic recovery.

    Things have really gotten bad when people are dog whistling for Bob Dole.

    1. Dang it RC, ya beat me to it, I was going to make a similar joke.

  3. I got in to a Facebook debate with an individual that claimed that regulatory capture and barriers to entry are conservative memes created by talk radio. He then proceeded to provide American cellular providers as an example of the bad things that happen with deregulation. This is what they actually believe, the industrial sized stupid was painful. We’re so screwed.

    Oh and I would be more than okay if that picture was not used anymore, thanks. While amusing, it is way over done, there is somebody taking pictures of politicians on a nearly non-stop basis, particularly the President. Surely we can find another entertaining photo. k thx bai

    1. I got in to a Facebook debate

      Mistake number one. Arguing with people on Facebook is an exercise in masochism on par with waxing your pubes.

      with an individual that claimed that regulatory capture and barriers to entry are conservative memes created by talk radio.

      Right. Ask him to explain why the IRS creates regulations that supposedly protect the poor, dimwitted, unsuspecting taxpayer from the horror of shoddy work, and just so happens to benefit HR Block and Jackson-Hewitt?

      1. Hey!! You’re messing with my paycheck! The IRS and storefront tax preparers are in a symbiotic relationship with each other. Well, I guess it’s more parasitic from the IRS’ point of view. Unfortunately, if you’re gonna get those big tax refund checks without putting anything in, you either need to be versed in tax law or come to us. Sorry, but somebody’s got to do it.

      2. Yeah, I acknowledge that FB is one of the worst places to talk politics, but the call of the stupid was too strong. It was my siren song.

        I beg forgiveness from the comentariat.

        1. You were arguing with shrike on Facebook?

        2. I don’t argue on FB. I teach on FB. If they don’t wanna know, it’s not my problem.

  4. “That’s what governments are for: to get in a man’s way.”

  5. I respect Richman’s point, but I can’t help but think he didn’t quite express it correctly. To see why consider the following choice: One candidate would keep Obamacare in place, would neither add to nor repeal any of the increase in regulation under the current administration, would have government spending grow at the combined rate of inflation and population growth and would leave the Fed to do as it pleased. The other would repeal Obamacare, slash government spending (including military), repeal all regulation that didn’t prohibit rights violations, significantly reduce taxes, and curtail the Fed’s mandate to the provision of liquidity (not perfect, but a step in the right direction). Which would be more vigorously “acting” on the economy? Which would be more likely to produce broad prosperity? I’m inclined to say the latter in both cases.

    1. When you say “the other” you mean Gary Johnson, right? Is there any evidence that Romney will do any of the things you mention?

      1. The first candidate to which Bill refers is Romney.

        1. I won’t deny that. Romney did sort of come to mind when I was writing him up.

        2. The really sad part is that, for all practical purposes, the choice doesn’t really come down to the two I presented, but to the first candidate and a candidate who is going to keep damaging the economy even more.

  6. “We must stop looking to politicians for recovery. The path to prosperity is government retrenchment: the elimination of taxes, regulations, government spending, corporate privileges, and all other barriers to social cooperation.”

    Yeah, good luck with that.

    I wish.

    But good luck.

    1. Wasn’t it Rufus T. Firefly?

      1. Yes

        http://www.imdb.com/title/tt0023969/

        Sorry to tell you that your name is incorrect.

        1. Rufus J. Firefly was a character in Rob Zombie’s House of 1000 Corpses and The Devil’s Rejects.

          1. must be Rufus T’s grandson.

            1. I get that a lot. I’m not from Freedonia.

              Gotta love the “gatekeepers” making sure it was Rufus T. Firefly.

  7. Repair the roads, bridges, and schools, and unemployment will disappear. Hire the idle construction workers, pay them to do this work, then watch them spend that money and put other people to work. It’s so simple.

    Here’s an even simpler solution: Just cut everyone a check for $20,000 and save us all the time and trouble of waiting for the money to…trickle-down, so to speak, from these holy infrastructure projects (which will be generously staffed with organized labor) to everyone else.

  8. Keynesian economics isn’t completely wrong, there are some good observations in it, and they can predict certain things now and then. Of course ultimately it’s a failure because it ignores some key fundamentals. And for that matter all macroeconomics looks like pseudoscience to me. But I really don’t think regime uncertainty is sufficient to explain away consumer confidence.

    Also, the govt can greatly hinder recovery in other ways, such as what you might call the “obama put”, where workers and investors wait for the govt to reinflate the bubble rather than deal with the new fundamentals of the economy.

    1. The word “Keynesian” is dishonest anyway. A government could adopt a Keynesian policy just by pegging growth of the public sector to the underlying average growth of the private sector (that is, averaging out the peaks and troughs of the business cycle).

      The nature of taxes is to rise with booms and fall with busts. If your spending follows the underlying average, then in a boom, you’ll run surpluses (tax revenues go up, spending stays steady); in a bust you will run deficits (tax revenues go down, spending stay steady). Exactly the countercyclical policy Keynesianism demands.

      Krugmanomics is its own thing. When times are good, stimulate demand. When times are bad, stimulate demand harder. If that doesn’t work, you didn’t stimulate demand enough. His entire philosophy can fit on a bumper sticker: “NEEDS MOAR STIMULUS”.

      1. I’d summarize Krugmanomics as: republican president policies wrong, democratic president policies right (except to the degree that democratic policies get sabotaged by republican obstructionists).

        1. Are there no “democratic obstructionists”?

          Well, only if the republican at the top of the heap is insufficiently leftist enough, I’ll grant.

          Honestly, though… micromanaging never works, in economics or in personal-level life issues. Both Teams are oblivious to that.

    2. The problem with Keynesian economics, as one writer put it, is that it Keynesianizes the economy.

  9. “they promise to ‘get the economy moving,’ as though it were a stalled vehicle”

    Stimulus is like putting govt-subsidized “green” bio-diesel fuel in your truck. It allows the truck to run, but is less efficient, easy to contaminate, and eventually damages and stalls the engine.

    In a free market, each transaction is optimized by competitive motivation for each party to acquire Knowledge of the Quality, Prices, Costs, and effective Usage/Re-sale of the goods and money invested or traded.

    When the govt interferes in the market with stimulus or printing or unionization or haphazard regulation, Knowledge of Quality/Prices/Usage/Re-sale is LESS CERTAIN, because quality is degraded by spoiled workers, prices/costs are distorted, and Usage/Re-sale is less predictable.

    Govt is sabotaging the market machinery with all kinds of gum and wrenches thrown in. Drivers should run over them in (electoral) retaliation before the trucks quit running altogether.

    1. … eventually damages and stalls the engine

      It’s a short run thing. We’ll buy a new truck every 3 years with borrowed money anyway, so it doesn’t matter if the truck is a disaster by year 4.

  10. Hey!! You’re messing with my paycheck! The IRS and storefront tax preparers are in a symbiotic relationship with each other. Well, I guess it’s more parasitic from the IRS’ point of view. Unfortunately, if you’re gonna get those big tax refund checks without putting anything in, you either need to be versed in tax law or come to us. Sorry, but somebody’s got to do it.

  11. W/r the headline: I never understood the advantage of adding a syllable to “impotence.” The same w/r to competence, etc.

    1. Kinda like someone ‘taking a decision’ rather than ‘deciding’.
      I don’t know why, either.

  12. I don’t spend because I’ve decided that most everything is a ripoff. Lack of transparency is what stops me.

  13. How much money do we have to donate to Reason to retire that Obama-Superman picture?

  14. They will blame everything and everyone for their failures, but their inability to succeed has one source only: the political process?which is founded on force, not peaceful economic cooperation?is singularly inappropriate for creating prosperity.

  15. “Spend it how? This is where the incantation “infrastructure” comes in.”

    Wrong! The incantation is ‘crumbling infrastructure’. The people who are determined to spend us into prosperity cant even think of a different trope.

  16. what investment requires, besides confidence, is savings

    I got a C in economics because I wrote savings is investment. Every economist knows investment is magic from the government and savings is hoarding.

  17. and preferences, but also of their expectations about an inherently uncertain future. These expectations can be clouded or changed by additional uncertainty about what an erratic http://www.ceinturesfr.com/cei…..-c-13.html government will do next, which economic historian Robert Higgs calls “regime uncertainty.” People are less likely to make bold, long-term business decisions, t

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