Wednesday, October 22, 2008

Did The Free Market Fail?

It's just possible that the worst consequences of the bubble and its inevitable pop is, not the foreclosures or failing banks, or even the hundreds of thousands of lost jobs, but the final destruction of what remains of economic freedom and the nearly complete socialization of the U.S. economy.Even pundits whose opinions I generally respect are joining the chorus and blaming Free Markets for the almost surreal ballooning of debt, and the inevitable disastrous consequences of that, over the past ten years..... just as they did in the 1930s, when a series of expensive and over-reaching government interventions, very much like those be done now, did nothing to stop the rapid deflation of the credit bubble created in the 1920s.

I have just a few little questions: When has the United States ever been a Free Market? And how can an economy that since 1880 at least, been driven principally by far-reaching policy decisions in conjunction with massive direct and indirect subsidies for chosen industries in combination with the deliberate destruction of others, be considered by any stretch to be a "free market?" And is there a single major trend of the past 100 years or so that was not the result of far-reaching policies that, more often that not, triggered wrenching dislocations in our economy and social fabric that not only more than offset whatever good was accomplished thereby, but additionally triggered chains of events and trends that cascaded and amplified over subsequent decades and ballooned into runaway trains in and of themselves, rolling heedlessly through the landscape and flattening everything in their paths? Our pathological automobile dependence and the destruction of our cities come immediately to mind, and so does the withering of our manufacturing economy, and its replacement by the financialization of the economy and our dependence upon monetary manipulation and the layering of debt to drive the economic growth.

One of my favorite exercises in visualization is to try, if I can, to imagine the physical and economic landscapes as they would be without the creations of our policy makers in conjunction with crony businesses and their lobbyists. Would 90% of our population be completely dependent upon autos for transportation, and would our cities and their dense networks of commerce, industry, and public transportation have been utterly destroyed if we had not, 80 years ago, converted the sentimental cravings of Americans for rural live as depicted in Currier& Ives illustrations, into public policies that dictated suburban development further and further into the hinterlands of cities for decades out, financed with massive allocations of tax monies? Might we still have a fully diversified, manufacturing economy had not our major industries been rendered uncompetitive and ossified by the huge guaranteed profits of defense contracting? Would the old cities of the Eastern half of the country, with their favored locations on waterways and rich farmland just outside their boundaries, have lost half of their populations to cities in the desert that could not exist without hundreds of billions of dollars in "investment" in transportation and water diversion, beginning with the massive subsidies to Union Pacific in the form of land grants that made possible the transcontinental railraod, to the pharaonic water diversion and highway projects of the 20th Century, all paid for with tax dollars?

Steve Saville, in "Trying to Get Something for Nothing", identifies with precision the absurdity and destructiveness of government intervention in the financial system and how government policies have been the root cause of this debacle, as well as that of 1929-1933. Saville confines himself to two main facets of government intervention, specifically the belief that rampant infation in housing prices was good and should be promoted by government policy, and that the way to do this was to push interest rates as low as possible and flood the country with easy money available to anyone, regardless of their ability to repay.

I could add that these policies were rendered ever more destructive by removing the very last constraints on speculative excess by the government financing, direct or indirect, of the greed stampede, namely through the alphabet soup of government agencies and government-sponsored entities-HUD,FHA, FNMA, GNMA, and the rest- whose sole purpose was to serve as a place for financial institutions to offload undesirable loans for which there was no other market, and to make "ownership" possible for people who can barely pull their rent together, or people who chronically spend themselves into steep debt no matter how high their incomes are.

We have, over the past century, ceded to our authorities almost unlimited power to steer our economy and our lives according to the dictates of whatever intellectual or social fad holds sway at the moment, and to codify it into policies that become rigidly entrenched long after they've proved to be fallacious, and have become drivers of destruction. Once a program or agency is in place in this country, it is reinforced with layers of bureaucracy that are self-perpetuating and have a tendancy to replicate themselves vorociously, especially those which, like our various housing agencies, dovetail with the business needs of large and profitable industries, such as the home builders and financiers.

Worst of all, at the same time we provide easy, unearned subsidies to certain industries, we destroy others that might better serve our needs, and with greater efficiency and with solutions that better fit the need, than their heavily subsidized competition.

What we have had is not in any sense a "free market", but a mixed economy, an economy in which most goods and services are produced by entities that are organized as for-profit concerns, and owned by shareholders, but whose direction and business are driven by public policy, by means of outright directives, as well as favored tax treatment, and various direct and indirect subsidies. We have so extensively subsidized so many industries in so many ways- indirectly or directly, openly or covertly, that it is now impossible to describe any part of our economy as "free".

A mixed economy almost never remains so, but will always tilt in one direction or the other, and it will usually tilt toward complete statism, as is happening now. This happens as the failures of policy begin to cascade, as they are now, and produce a situation of emergency, causing more and louder calls for more intervention, which usually consists of actions of the sort that caused the problem to begin with... as is happening now, as each intervention is larger and costlier than the last with ever diminishing returns.

And we are now almost at the end of the road toward complete socialization, and our politicians and policy makers are, predictably, attempting to mitigate the situation they've created over the past 20 years by the very actions that created the mess to begin with-by flooding the country with more fake money in the form of easy credit-and attempting to muffle the "feedback" that, left to run its course, would help the situation correct itself. At this time, over half the population of the country is employed by a federal, state, or local government agency, and a substantial fraction of those employed by nominally private concerns are dependent upon subsidies, such as our commercial airlines, major agribusiness, and most land transportation, begging the question of who remains to pay the bills for the bureaucracy, inefficiency, and misallocations of money and resources that inevitably result from government "assistance".

What will the next stage be? A treasury default? The annual budget deficit has now topped a trillion dollars, and the total treasury debt now stands at about $11 Trillion. It's doubtful we will be able to raise more tax revenue in a rapidly deflating economy, so our leaders have opted to inflate our way out of the situation, to the utter destruction of our elderly, our savers, and all of our poor and working poor population. The result will be that our poor will grow poorer, and a greater portion of our middle class will fall into poverty that deepens every year, with no hope of ever climbing out, especially since we now have to compete with other nations for a diminishing pool of resources.

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