By Arthur Foulkes
The political response to the American financial crisis and the resulting recession has — starting with President George W. Bush — been to increase government involvement in the economy.
President Bush said he was abandoning the free market to save the free market by orchestrating bailouts of financial institutions. Later, President Barack Obama orchestrated a massive economic “stimulus” package designed to get the economy moving again.
All this and (unfortunately) much, much more has been done in the past 18 months to “create” or “save” jobs and generally rescue the nation from economic hard times.
Yet there is only one sure antidote for economic stagnation: Freedom. Only market freedom, with free prices, profits and losses, can generate real prosperity.
John M. Keynes, the late father of much of modern macroeconomics, was a believer in government regulation and guidance of the economy. Unfortunately, his writings are the intellectual force behind much of the current response to the economic downturn.
In short, Keynes believed that the government is the only player in the economy with the wisdom and foresight to keep things in balance. Consumers, Keynes believed, may not always spend enough to keep the economy out of recession and, more importantly, investors are driven by “animal spirits,” a term Keynes used to suggest business psychology trumps business economics. This implies investors cannot be trusted to maintain a growing, healthy and stable economy.
According to Keynes, only government can, in a timely fashion, provide the spending — the “stimulus” — needed to return the economy to full employment and prosperity in the event of a recession.
But Keynes’ view of investors was condescending and, more importantly, wrong. Investors are not motivated by “animal spirits.” Rather, they are motivated by the desire to earn profits. They will invest when they believe profits are likely and refrain from investing when they appear more doubtful. There is nothing particularly “animal” about that. On the contrary, massive government intervention in the economy, with the resulting deficits, regulations, borrowing, taxation and potential monetary inflation, discourages private investment, thus delaying genuine recovery.
Furthermore, government spending is no magic bullet. In truth, it’s just a bullet. This is true because government spending can only come from one of three sources: Taxes, borrowing or inflating the currency.
When government spends tax money, it simply takes purchasing power out of private hands and puts it into politically favored hands. When government borrows, it merely makes private borrowing more expensive and creates future tax burdens. And when government prints new money, it distorts prices as the new money enters specific (and politically favored) sectors of the economy. Printing new money also eventually reduces the purchasing power of all existing money, imposing a stealth tax on everyone, especially savers and creditors.
Massive government intervention in the economy, especially in the lending markets and the housing market, was the cause of the current economic downturn. Unfortunately, the widely accepted Keynesian prescription for economic recovery currently in use will merely expand the public sector and continue to weaken the private.
In short, increased government intervention is not the answer to the current (or any other) economic slump. More economic freedom is.
Arthur Foulkes is a Terre Haute native and longtime resident. The Tribune-Star reporter writes a column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@
tribstar.com.
