Less rather than more government intervention is needed to cure the recession

The article below is American but is applicable to Australia too

The story is told that Ludwig von Mises was once asked, "Do you mean to say that the government should have done nothing during the Great Depression?" Mises responded, "I mean to say it should have started doing nothing long before that."

I hope the story is not apocryphal, because it perfectly sums up the government's proper role in managing the economy: none. The misnamed stimulus law is now on the books. While nearly everyone believes the government has to do something to get the economy out of the recession, those who understand markets insist that we'd be better off if the government did nothing at all. Of course, politicians are incapable of doing nothing when there is harm to be done, but the "stimulus" critics intrepidly insist that anything the government does will be worse than doing nothing at all.

This is certainly true. Unquestionably, doing nothing is better than borrowing nearly $800 billion from the credit markets (to be repaid through inflation and taxation) and spending it on pet political projects, from food stamps to bridge repairs to subsidies for favored energy forms. (Remember opportunity cost!) Doing nothing is indeed is an attractive option. For example, it would avoid re-stimulating parts of the economy shouldn't have been stimulated in the first place, such as housing and autos. As economist Mario Rizzo said recently, "Trying to prop up housing prices or injecting capital into areas of misallocation is a bad idea. It prevents the market's corrective mechanisms from working. Wealth should not continually be destroyed after the errors of the bubble have been revealed. This is the proverbial practice of throwing good money after bad." (Watch Rizzo's presentation here. The written remarks are downloadable here.)

But, frankly, doing nothing is only the second-best option. We can do better. We need the government to do less than nothing. It should undo many things.

Government-Inflated Bubble

Let's remember that government created the housing bubble through a constellation of policies that made borrowing for home mortgages - prime and subprime - artificially attractive. Because of the securitization of mortgages (in itself a good risk-spreading device), the consequences of government housing policies spread far beyond the housing and banking industries. When home prices seemed to be perpetually rising, people were encouraged to refinance their homes and withdraw equity so they could spend the money on cars, trips, and other big-ticket items. Government-stimulated demand touched everything. When the bubble popped - when interest rates rose and the housing glut became apparent - things turned around. People now had costly mortgages they couldn't refinance; homes bought on the expectation of early profitable resale were now money losers. The party was over.

It was a party that couldn't have been thrown without politicians eager to do things for us and, not coincidentally, to boost their reelection prospects as well. The upshot is that if the economy is to thrive again, the reigning philosophy of government as a social service center will have to change. Many things will have to be undone.

These things will strike most people as politically impossible, but if no one ever talks about them, that's what they will remain. We have to start somewhere. The first thing we need is a monetary system that is beyond the reach of manipulative politicians and political appointees. Whatever the Fed Reserve's role in the housing bubble - even if it was only the Alan Greenspan's promise to provide liquidity to overextended lenders - the central bank has again proven itself hazardous to our economic well-being. When will we cease to tolerate this continuing threat in our midst? When will we realize that the mortals who run it cannot know how much money the economy needs or what interest rates should be? Market-rooted money - most likely gold - and free banking are long overdue. How can we afford to wait any longer?

No More Housing Policy

Also on the list of things to go is every manifestation of housing policy. In a free society there would be no such thing. The alphabet soup of agencies - from HUD to FHA to FHLB, and the rest - should be abolished at once.

The same goes for those privileged cartoon characters Fannie Mae, Freddie Mac, Ginnie Mae, and any I may have overlooked. They exist to circumvent the market in order to carry out the agendas of politicians, who must dispense goodies to favored constituencies in order to keep their hold on power. Because the agencies are backed by captive taxpayers, they are can do things no free-market institution can do, such as obtain special low-interest loans and guarantees. These bureaucracies have no place in a free market. If we haven't learned that by now, what will it take? (We haven't learned it. The Obama administration wants to give them more billions.)

While we're at it, let's get rid of the income tax if for no other reason than because it would end the mortgage deduction. We must stop thinking of home-ownership as something worthy of government privilege. There's nothing magic about housing. It's one more thing we need. Yet it gets special treatment in the law, and economy-watchers give it special attention. Why do news agencies report housing starts faithfully each month as though the fate of the planet hangs in the balance? They never tell us how many computers, Coca-Colas, or boxes of Cheerios were produced.

Other taxes should be cut or abolished too, including the payroll tax, which is a tax on hiring. But - this is often overlooked - tax cuts without spending cuts require more borrowing and more inflation. It's a bad bargain in the tradition of Keynes. We must cut government spending along with taxes.

If government really wants to make it easier for people to own homes, let it give up control of money and banking, divest itself of the land it holds off the market, and generally relieve society of its endless burdens. The biggest favor the state can do for us is to stop doing us favors!


Posted by John Ray. For a daily critique of Leftist activities, see DISSECTING LEFTISM. For a daily survey of Australian politics, see AUSTRALIAN POLITICS Also, don't forget your daily roundup of pro-environment but anti-Greenie news and commentary at GREENIE WATCH . Email me (John Ray) here

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