Breeding pessimism: Part I

Policy responses from our politicians will exacerbate the recession

By Geoffrey Lawrence
  • Thursday, November 12, 2009

Statistics released last week reveal that the national unemployment rate has topped 10 percent for the first time in a quarter-century. Though October's state-level data has yet to be released, Nevada had the second-highest unemployment rate in the nation for September, at 13.3 percent. That figure is expected to increase when the new statistics are released. However, for the unemployed, federal politicians are ensuring that the outlook is grim — even beyond the medium-term.

The policy responses coming out of Washington, D.C., over the past year promise only to exacerbate economic woes. Rather than allow mismanaged firms on Wall Street and in Detroit to fail, liquidating their assets for more productive uses by more competent entrepreneurs, policymakers have chosen to bail out these firms with public funds. The result is an inefficient allocation of the nation's productive resources that will continue to stunt economic growth.

When politicians protect large, failing corporations from competition and market accountability through federal bailouts, the damage goes beyond mere misallocation of productive resources. Their actions actively encourage these corporations to behave irresponsibly by insulating them from the negative consequences of their behavior. As a result, business executives who know they can lean on politicians for federal support when overly risky business decisions fail are more likely to again undertake unsound investments — the phenomenon known as "moral hazard." 

Adding insult to injury is the fact that many bailout-granting politicians owe their election in part to campaign donations from rent-seeking executives.

This combination of government protection and moral hazard is dangerous, forcing American families to suffer at the hands of Wall Street executives and their accomplices in Washington who, together, have corrupted the capitalist system. Increasingly, the nation's productive resources are locked up in a handful of government-protected firms. As a consequence, total economic output depends more and more on the decisions taken by those firms — decisions which are adversely influenced by the moral-hazard dynamic.

The emergence of double-digit unemployment is evidence that American families are paying for the inefficiencies inherent in this corporatist model of government. Private families are directly impacted by the harmful effects of corporatist deal-making through higher job loss and lower income. As the parasite grows stronger, the host grows weaker.

The downward spiral caused by these twin killers — government protection and moral hazard — can only be corrected by a fundamental change in the broad scope of economic policy. Only a laissez-faire approach can ensure the most efficient allocation of resources for meeting the needs of the greatest number of individuals and at the same time overcome the moral-hazard problem.

The policy responses emanating from Washington move in exactly the opposite direction.  Policymakers at the federal level have forced taxpayers and holders of American dollars to prop up mismanaged firms and firms that exist only because of bad investments — the result of malinvestment inspired by misleading interest-rate signals from Federal-Reserve inflation of the currency. In so doing, policymakers have also rewarded and encouraged poor decision-making by executives in these firms.

Virtually all evidence suggests Washington is likely to continue these policies that exacerbate recession instead of spurring recovery and that penalize private families in order to benefit politically connected corporate fat cats. 

The nation's elected politicians are saying one thing and doing another. They pay lip service to the need for recovery and job growth, yet their actions are laying the foundations for a broader and deeper recession to come. 

While they speak rhetorically of "hope," in reality they are breeding pessimism.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.

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