Archive for October 7th, 2010

Statist Policies Cause More Harm Than Good

When will those that call on government to solve all of our problems ever learn that they cause more harm than good?  They cannot use government to solve one problem without causing others.  They cannot attempt to help one group without hurting another.  They continue to advocate using government in areas it doesn’t belong which only leads to more suffering for all of us.

The proof is in the pudding.  Take the continuing housing crisis for instance.  Housing prices continue to fall.  This is exacerbating foreclosures and statists would claim preventing economic recovery.  So over the last two and half years the federal government has attempted to stabilize housing prices by keeping interest rates low, providing tax credits for first time buyers, and cajoling lenders to modify millions of mortgages to prevent foreclosure.

At the same time, a massive housing glut existed due to the building frenzy of the Fed induced boom years.  Understandably, since the crisis hit lenders have tightened lending standards as a reaction to their past sins.  This has caused a shortage of qualified buyers to purchase homes.  In other words, there are not enough buyers in the market with enough money and good credit to buy up the surplus houses so the economy can recover.

Of course, government policy has it all backwards.  The Obama Administration has attempted to help irresponsible home buyers at the expense of everyone else.  It has attempted to keep the housing bubble inflated with its policies.  This attempt to stabilize housing prices has no doubt prolonged the recession indefinitely because in order for recovery to take place it is obvious that prices need to fall further.  They need to fall so all the surplus housing can be bought up.  But with lending standards tightening (rightly so) there are not enough eligible buyers to suck them up.

The correct policy from the start of the recession would have been to allow the market to correct itself.  This is what recessions are for – like throwing up during the flu to rid the organism of bad matter.  Obviously housing prices are still overvalued because we still have a glut and prices are still falling.  Econ 101 teaches that to eliminate oversupply the market must lower prices and that prices will continue to fall until the point of equilibrium – that point where ideally supply meets demand. Thus current falling home prices are regrettably important right now to allow the housing market to recover.  Housing will not recover until prices align with market conditions no matter how hard Obama and Bernanke try to defy the market.  Yes, foreclosures will increase further and people will be hurt but as prices fall farther more Americans will be able to qualify for loans they can afford.  Surplus houses will be purchased at current market prices not the artificially high government contrived prices.  Recovery will begin to appear.  Statist cannot have it both ways – they cannot stabilize house prices while at the same time eliminate the housing surplus.  Prices must fall further to allow consumers to enter the market, buy up the surplus housing (mal-investment of the boom), and allow recovery to begin in the housing market.

The current housing crisis is bad enough but probably the greatest example of statists trying to have it both ways and failing miserably is their perpetuation of the myth that you can have high taxes, an abundance of regulations and full employment all at the same time.  Case in point, according to confidential internal documents of Toyota obtained by Congress in February of this year, company executives  were quoted as saying Toyota faced a “changing political environment” as one of its main challenges and expected a “more challenging regulatory” environment under the Obama administration’s encouragement.  Whether Toyota pulls production out of the United States like so many other companies have done is unclear.

And the companies that remain in the U.S. do face daunting red tape and high costs associated with hiring and retaining labor   Commenter Lew Rockwell has identified 11 “barriers” to full employment in the U.S.

  • The high minimum wage that knocks out the first several rungs from the bottom of the ladder;
  • The high payroll tax that robs employees and employers of resources;
  • The laws that threaten firms with lawsuits should the employee be fired;
  • The laws that established myriad conditions for hiring beyond the market-based condition that matters: can he or she get the job done?;
  • The unemployment subsidy in the form of phony insurance that pays people not to work;
  • The high cost of business start-ups in the form of taxes and mandates;
  • The mandated benefits that employers are forced to cough up for every new employee under certain conditions;
  • The withholding tax that prevents employers and employees from making their own deals;
  • The age restrictions that treat everyone under the age of 16 as useless;
  • The social security and income taxes that together devour nearly half of contract income;
  • The labor union laws that permit thugs to loot a firm and keep out workers who would love a chance to offer their wares for less.

What statists don’t understand is that labor is a commodity like steel and copper.  When government increases the cost of labor through taxes and regulations it causes unemployment.  At this very moment, firms are squeamish about hiring for the reason stated in the aforementioned Toyota memo – the Obama Administration’s inclination to increase laws and regulations.  At the end of the day, statists talk a good game about being interested in providing full employment, but their actions speak louder than words.  Their policies of more regulation and higher taxation are destructive to the domestic labor market.

Instead, in these economic hard times the federal government should gradually repeal all unconstitutional federal legislation dealing with the regulation of business and hiring.  Those issues are the jurisdiction of the states.  With federal barriers to full employment broken down, states would enter into a healthy competition for business and workers.  The national employment situation would improve and the most business/labor friendly states would probably even attract some of those companies that previously left the country to set up shop in their jurisdiction.

To be sure, there are many other examples of statist policies which attempt to solve one problem while causing others.  Government stimulus programs which attempted to jump-start the economy during this recession have only wasted trillions and put us deeper into debt.  Cash for Clunkers, meant to stimulate the car buying market has caused a shortage of used cars negatively affecting the working poor.  Obamacare, enacted to provide more Americans with health care, has actually led to McDonalds dropping coverage for 30,000 of its employees and to many insurance companies dropping child only policies in reaction to the mandate banning insurance companies from turning down children with pre-existing conditions.  Yes, government meddling usually has the opposite effect of what was intended and it causes a lot of damage.  If only statists could understand this and stop causing so much harm.

Article first published as Statist Policies Cause More Harm Than Good on Blogcritics

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

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