Bonzer Wolf™ (bonzerwolf) wrote,
Bonzer Wolf™

The Nanny State is killing the U.S. Economy

The ideal political-economic system is laissez-faire capitalism.

It is a system where men deal with one another, not as victims and executioners, nor as masters and slaves, but as traders, by free, voluntary exchange to mutual benefit.  It is a system where no man may obtain any values from others by resorting to physical force, and no man may initiate the use of physical force against others.

The government acts only as a policeman that protects man’s rights; it uses physical force only in retaliation and only against those who initiate its use, such as criminals or foreign invaders. In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church.

Public policy has focused almost exclusively on stimulating spending without much regard to why spending, especially consumption, has flagged. Until balance sheets (corporate and household) are restored, increased spending cannot be sustained.

Temporary spending and tax breaks are always dubious, and especially so now when the rational motivation is to save more and consume less. One-off tax credits for homes, for example, merely borrowed sales from the future. These fiscal programs predictably depressed rather than augmented future consumption.

Its move toward Japan-style quantitative easing is a misstep. And historically low interest rates—about which the Bank of International Settlements, the bank for central banks, sounded a warning in its 2009/2010 annual report—will inevitably distort economic activity, as they did during the housing boom. Low interest rates slow the process of restoring balance sheets by keeping asset prices artificially inflated. They also penalize saving, thus prolonging the process of rebuilding balance sheets.

In the fiscal realm, policy must be reoriented from stimulating consumption to encouraging productive investment (not renewed financial speculation). That means no income-tax increases or costly new mandates. In particular, the Bush tax cuts should not be allowed to expire. No matter how the administration spins it, their expiration would entail a large increase in marginal tax rates in the midst of economic weakness. That would further impede savings and capital accumulation, discouraging firms from expanding and hiring workers. Treasury Secretary Tim Geithner is proposing to repeat the mistake of Herbert Hoover, who persuaded Congress to raise taxes in 1932.

Markets are resilient, but their recovery can be impeded by bad policies. At present, both monetary and fiscal policies are on the wrong track.

Gerald O'Driscoll is a senior fellow at the Cato Institute. He was formerly a vice president at the Federal Reserve Bank of Dallas and later at Citigroup and is responsible for most of this entry.


Tags: economy, politics, recession, usa

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