Free Markets, Free People

Nobel economist lays our present economic problems at the feet of “government failure”

Gary Becker is an economist who has also been awarded a Nobel Prize in his field, but unlike the one which hangs out on the pages of the New York Times, hasn’t yet succumb to being a water carrier for a particular administration.  He also doesn’t seem to have any particular political agenda. 

Consequently, when he speaks I tend to listen and in today’s Wall Street Journal, he speaks.   It is well worth the read.  Some nuggets:

The origins of the financial crisis and the Great Recession are widely attributed to "market failure." This refers primarily to the bad loans and excessive risks taken on by banks in the quest to expand their profits. The "Chicago School of Economics" came under sustained attacks from the media and the academy for its analysis of the efficacy of competitive markets. Capitalism itself as a way to organize an economy was widely criticized and said to be in need of radical alteration.

Although many banks did perform poorly, government behavior also contributed to and prolonged the crisis. The Federal Reserve kept interest rates artificially low in the years leading up to the crisis. Fannie Mae and Freddie Mac, two quasi-government institutions, used strong backing from influential members of Congress to encourage irresponsible mortgages that required little down payment, as well as low interest rates for households with poor credit and low and erratic incomes. Regulators who could have reined in banks instead became cheerleaders for the banks.

This recession might well have been a deep one even with good government policies, but "government failure" added greatly to its length and severity, including its continuation to the present. In the U.S., these government actions include an almost $1 trillion in federal spending that was supposed to stimulate the economy. Leading government economists, backed up by essentially no evidence, argued that this spending would stimulate the economy by enough to reduce unemployment rates to under 8%.

Of course, while not a “leading government economist”, the NYT’s resident economist was right in the middle of cheerleading that spending as well.

More importantly, Becker addresses what opponents of capitalism always like to blame for any market downturn.  “Market failure”.  It is a bit like the climate alarmist crowd.  They prefer to ignore the sun’s effect on climate in order to put the blame on people.  In this case, the opponents of capitalism prefer to ignore the effect of government on markets in order to blame markets and thus insert more government.

And that increase in government intrusion is also talked about by Becker:

The misdiagnosis of widespread market failure led congressional leaders, after the 2008 election, to propose radical changes in financial institutions and, more generally, much wider regulation and government control of companies and consumer behavior. They proposed higher taxes on upper-income families and businesses, and extensive controls over executive pay, as they bashed "billionaire" businessmen with private planes and expensive lifestyles. These political leaders wanted to reformulate antitrust policies away from efficiency, slow the movement by the U.S. toward freer trade, add many additional regulations in the medical-care sector, levy big taxes on energy emissions, and cut opportunities to drill for oil and other fossil fuels.

Congress did manage to pass badly designed laws concerning financial markets, consumer protection and medical care. Although regulatory discretion failed leading up to the crisis, Congress nevertheless added to the number and diversity of federal regulations as well as to the discretion of regulators. These laws and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.

Of course, that’s precisely the problem we’ve been pointing out for a couple of years now.  The unsettled business climate has provided a disincentive to expand and hire.  The acceptance of the premise that it was the markets that failed have justified and driven the increases in regulation and government control.  Bottom line: businesses are scared to commit and thus continue to sit on the sidelines as they attempt to figure out the new rules of the game, even while more and more rules are being piled on top of the new rules.  Who in their right mind is going to risk their future and their money in a fixed game with rules slanted heavily against their success?

Answer?  Very few.

Becker then addresses what we all know is the 800 pound gorilla in the room that politicians still manage to ignore in favor other much less effective but more politically palatable actions:

The expansion of government resulting from the stimulus and other government programs contributed to rising deficits and growing public debt just when the U.S. faced the prospect of big increases in future debt due to built-in commitments to raise government spending on entitlements. Social Security, Medicaid and Medicare already account for about 40% of total federal government spending, and this share will grow rapidly during the next couple of decades unless major reforms are adopted.

A reasonably well-functioning government would try to sharply curtail the expected growth in entitlements, but such reform is not part of the budget deal between Congress and President Obama that led to a higher debt ceiling. Nor, given the looming 2012 elections, is such reform likely to be addressed seriously by the congressional panel set up to produce further reductions in federal spending.

It is a commentary on the extent of government failure that despite the improvements during the past few decades in the mental and physical health of older men and women, no political agreement seems possible on delaying access to Medicare beyond age 65. No means testing (as in Rep. Paul Ryan’s budget roadmap) will be introduced to determine eligibility for full Medicare benefits, and most Social Security benefits will continue to start for individuals at age 65 or younger.

In a nutshell, there is little political will to reduce spending on entitlements by limiting them mainly to persons in need.

I love the line “A reasonably well-functioning government” because it cuts to the core of the problem. Our problem isn’t markets.  Our government isn’t now nor has it been for a while “reasonably well-functioning”.  It is broken.  It doesn’t run or function well at all.  The proof is the “debate” that is now going on concerning spending, debt and deficit.  It is focused in the wrong area deliberately because politicians avoid hard and unpopular decisions which may cost them their power and prestige.  Human nature 101.  So they nip around the edges while ignoring the core problem.  And the result is $14 trillion of debt and no end to massive increases in that debt in sight.   It is a result of the total mismanagement of government by successive generations of politicians more concerned about politics than fiscal sanity and what is best for the nation.

And it isn’t just at the federal level his problem persists:

State and local governments also greatly increased their spending as tax revenues rolled in during the good economic times that preceded the collapse in 2008. This spending included extensive commitments to deferred benefits that could not be easily reduced after the recession hit, especially pensions and health-care benefits to retired government workers.

Unless states like California and Illinois, and cities like Chicago, take drastic steps to reduce their deferred spending, their problems will multiply as this spending grows over time. A few newly elected governors, such as Scott Walker in Wisconsin, have pushed through reforms to curtail the power of unionized state employees. But most other governors have been afraid to take on the unions and their political supporters.

The perfect example of why more of what is necessary isn’t being done can be found in Wisconsin where politicians actually stood up and have done what is necessary.  Result?  Childish tantrums from unions, recall elections and daily vilifications by opponents.  Who would willingly subject themselves to that as a routine part of their job?  Very few.  And thus, as Becker points out “most other governors have been afraid” to even suggest doing what is necessary, much less do it.

Becker concludes with something we’ve been trying to get across for years.   It is exceptionally well stated and, as far as I can determine, quite true:

The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.

The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article "Competition and Democracy" published more than 50 years ago, I said "monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market."

The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.

Exactly.  And as Becker states, this is “based on abundant evidence”, not something some government economist pulled out of thin air (like the example in which government economists claimed spending the stimulus would keep unemployment under 8%).

Markets certainly have their hiccups and the like, but most of that is because we deal in a world of imperfect information.  But markets adjust and compensate and it is competition that is the driver of those market changes.   Government intervention only interferes in that mechanism and magnifies the imperfections Becker notes.  At some point, the intrusion is so great that the market can’t recover.  That’s usually when we hear the term “market failure” used with the proposed remedy being even more government intrusion.

And we end up right here.  The question, of course, is whether or not this is the place we want to be?  If not, one would hope the remedy is fairly obvious.  Painful, perhaps, but obvious.  Our debt doesn’t exist because of the markets.  Our debt exists because of government.  What is it going to take to get it properly acted upon and fixed?


Twitter: @McQandO

25 Responses to Nobel economist lays our present economic problems at the feet of “government failure”

  • These “Fannie Mae and Freddie Mac, two quasi-government institutions” .. wasn’t one of these under the “outstanding leadership of Franklin Raines”  (I just love to say that) ?
    Yeah.  This had Barney Franks fingerprints all over it.  He should be in stocks on the step of the Capitol for all to throw rotten tomatoes at.

  • There was a story the other day (no link) that stated that DOJ has been out putting pressure on the banks to make cheap loans to the .. pick your aggreived party.
    These mothers haven’t learned anything.  Not on the loans .. not on the debt.

    • They’re just trying to make sure the blame doesn’t fall on the government.
      They’re shocked!  shocked!  to find out banks were making loans to people who couldn’t afford to pay them off!
      Quis custodiet ipsos custodes?

      • … but they just keep doing it again and again …

        Valerie Jarrett, a close friend of the Barack and Michelle Obama is the former CEO of Habitat Company, which managed Grove Parc, a federally subsidized apartment complex on Chicago’s South Side that can be accurately described as a slum. Jarrett is now a senior adviser to the president.
        On Wednesday with great fanfare the awarding of a $30.5 million federal grant to revitalize Grove Parc–by tearing it down–was announced.

        In fact, no mention of her role in mismanaging the unhappy homes was mentioned by the Chicago Sun-Times or the Chicago Tribune.

    • But what Justice is up to sounds like the same government-directed, quota-based lending push that brought us the last housing boom and bust.

  • I think that I just saw a flock of flying pigs go by the window!

    Ok who put the LSD in my hot cocoa this morning?

    • Zero job growth ..  Obama said they were of little impact the other day .. today he needs to stop that.  This is desperation.

    • While that is good news, the timing is also noteworthy.  No, not after today’s jobs report but on the Friday before a holiday weekend.  Concerned how this will look to his base, Obama is doing the right thing for the wrong reason.

  • Meanwhile, back at the vault, they were handing out dough:
    Illegals received $4 billion (that’s right BILLION) in tax credits.
    Read it, the IRS whines that they couldn’t deny the credits –
    “The IRS said it lacks the authority to disallow the claims.

    Wage earners who do not have Social Security numbers and are not authorized to work in the United States can use what the IRS calls individual taxpayer identification numbers. Often these result in fraudulent claims on tax returns, auditors found.”
    And it takes your DC id to get 5 sandbags from the city to protect your home from flooding, but you don’t have to show ID to vote.
    “Broken government” is an calamitous understatement.

  • Note: If memory serves, the Administration said unemployment would not exceed 6.8% if the Stimulus Package was enacted but would reach 8.0% if the Stimulus Package was voted down.

    • Now they’re pretending whatever they did kept all of us from becoming unemployed, and that it’s STILL Bush’s fault (now, 3 years in…)
      Bush, the all powerful.  Obama, the weak, and ineffectual.

    • If you go back and read the stories at the start of the Obama administration, between the lines you can see that Obama thought it would be easy to “kick start” the economy.  Now, 2 and 1/2 years later, the economy is stuttering to a stop after fed-driven pathetic recovery.  Any normal person would have learned by now that the federal government has plenty of power to destroy, but pathetic power to push the economy forward.
      I can’t imagine any program that could be passed by a Democrat-controlled Congress that could pull this out for Obama.  Since it currently isn’t Democrat-controlled, Obama should announce that he won’t seek re-election, but we all know that ain’t gonna happen.

  • This was predicted when Obama announced the closure of Gitmo …
    … what do you do when you don’t want to capture them any more …

    CIA shifts focus to killing targets
    This is just so … Progressive

    • Huh…  I remember when that was mostly a Hollywood myth, and bad.  Now it’s SOOP (Standard Obamic Operating Proceedure), and a great big “meh“…

  • Markets certainly have their hiccups and the like, but most of that is because we deal in a world of imperfect information.  But markets adjust and compensate and it is competition that is the driver of those market changes.   Government intervention only interferes in that mechanism and magnifies the imperfections Becker notes.

    This point needs to be hammered home relentlessly.  A favorite straw-man argument of liberals is that “markets aren’t perfect – look at this or that example!”.  This typically precedes their outline of a (government) plan which will be even less perfect.  These people need to be slapped hard with Churchill’s observation (paraphrased) that democracy is the worst form of government, except for all the others.
    Nobody sane claims that markets are perfect – just that the alternatives are even less so.

    • Many of them have learned to cloak their ideas and policies in “market-speak” which mimics free market concepts, but is designed to do an end-run.

  • No mention of Fannie/Freddie and the havoc they wrecked? No mention of the securities they flooded into the market, that handled MBS’s for years with no hiccups? Passing mention of FORCED reductions in lending standards that had worked for hundreds of years…? (Edward Pinto, of AEI challenges the “conventional” (read: MiniTru) “wisdom”.

    • The US Federal Housing Finance Agency (FHFA), which is overseeing the remains of failed mortgage giants Fannie Mae and Freddie Mac, is reportedly planning to argue that America’s biggest banks failed to check the health of mortgages before they sold them on to investors. The collapse of hundreds of thousands of sub-prime mortgages triggered the 2008 credit crisis and the collapse of Fannie and Freddie.

      You really have to wonder if this is a good idea. On the bright side, if this comes to trial, it will get resolved who started this mess.

      • Sorry, I profoundly disagree.  Paul Krugman himself (or somebody I conflate with Krugman) editoralized back near the turn of the century (heh!) that their needed to be a housing bubble inflated with easy money.
        Clinton’s execrable Reno made her agency the outlaw strong-arm branch of the central government, and very publicly let it be known that Justice would MAKE lenders loan money to target classes.
        Time after time, voices…some very prominent…warned of the impending doom this CRAP loans house of cards would bring.  Maxine Waters, Chris Dodd, Bawny Frank and other Collectivist corruptocrats shouted them down…often with the explicit or implicit use of the race card.
        None of those people will be near a court.

  • Maxine Waters, within days…
    speaking of what Obama should do…

    bring the gangsters in, put them around the table, and let them know that if they don’t come up with loan modifications and keep people in their homes, that they’ve worked so hard for, we’re gonna tax them out of business.

    This is the same “civil” lady who is under investigation for funneling money to her own husband’s bank, and who said the TEA Party can go straight to hell.
    The best response to that came from a black commentator; living in Congressional districts like Waters’ IS hell.

  • More government failures…
    There’s been only one visible Fast and Furious resignation: U.S. Attorney Dennis Burke in Phoenix, who quietly stepped down on Tuesday. One of his last acts? Opposing the request of murdered Border Patrol Agent Brian Terry’s family to qualify as crime victims in a court case against the thug who bought the Fast and Furious guns used in Terry’s murder.–Michelle Malkin

    Read more:

  • So much of  this talk about markets and government meddling with markets is missing the point.  Obama is not interested in competition or free markets.  Obama is about equal outcomes – what he calls social justice – not equal opportunity.
    Obama is not alone.  Democrats in Congress have for  years screwed with banks and through idiotic “fair lending practices” laws and regulations forced banks to make loans to people who weren’t capable of repaying them.  Most of these borrowers were minorities.  Obama and a lot of Democrats feel there are still many things that are owed to minorities.  This includes a house even if the new homeowner can’t afford it and doesn’t deserve it.

  • Although this doesn’t exonerate government, thing’s didn’t go to crap just in the past two years.  There were crap 2 years ago.
    This administration has done nothing to fix it.  The stimulus isn’t working.  But the negative consequence of the stimulus, at least while the money is being pumped out, should be hyper inflation and future debt payments.  There’s some inflation, but a good part of that is problems with the dollar and not enraged demand.  The penalty of the debt payments starts in a year or two.
    So past the government induced uncertainty, which is important, we’re in horrible economic shape.  Offing Obama politically isn’t going to fix it.  Its more messed up than him.
    Personally we don’t do enough actual stuff here.  We import too much.  We need an market correction in labor in the this country to people can get off unemployment.  It means a lower standard of living for everyone, but the longer we try to fight it, the more painful the correction will be when it happens.