Friday, May 29, 2009


There is a time and place for government intervention in the actions of the people. But I'm more convinced than ever that the true role of government in economics is much smaller (and the importance of private business is much greater) than anyone in DC would have us believe based on their policies.

An excerpt from The Economist

The American economy is dynamic because Americans like it that way, even now. A Pew poll released on May 21st found that 76% of Americans agree that the country’s strength is “mostly based on the success of American business” and 90% admire people who “get rich by working hard”...

Yet Mr Obama—and, even more, his Democratic allies in Congress—could do lasting damage to this marvellous machine. That is not because the president is a socialist, as his detractors on talk radio claim. No true leftist would be as allergic as he has been to nationalising tottering banks, nor as coldly calculating in letting Chrysler, and probably General Motors, end up in bankruptcy court.

Moreover, even the most stalwart defenders of the free market, including this newspaper, admit it has shortcomings that only the government can address. The financial system requires close oversight, or crises will destabilise it. In recent years, such oversight has often been absent or fragmented...And the current crisis calls for aggressive and temporary fiscal and monetary intervention that is not justified in ordinary times.

But the Democrats’ present zeal for government activism often goes well beyond addressing market failures. The president and Congress seem to believe that they can surgically intervene in the economy but overlook the unintended consequences.

Fiscal and monetary policy are more powerful than an atomic bomb. Milton Friedman said that they should only be used to balance the natural growth of the economy, that there is no place for monetary activism in a stable economy. I wouldn't even go so far as to say that this is a "crisis" in the way that most Americans imagine it. Economists are the last ones to freak out in a recession because they have a long-term, "big picture," wholistic perspective of what's going on. (That's just one of the reasons economics is such an attractive subject to me. Everyone's just chill and levelheaded. It's beautifully unemotional.)

We talk about "what should be done" but fail to consider that things often sort themselves out with less intervention than we suppose when we're in the middle of it. Economics always seek equilibrium and rarely need government assistance to do so. Whether we're implementing a National Sales Tax or creating a Systemic Risk Council, if we think in terms of "There's no room for more delays!" as José Manuel Barroso said, we will run into more trouble than we can see from our shortsighted perspective.

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