Wednesday, November 26, 2008

Government has caused this panic

Published in The Tennessean, October 23, 2008

Government has caused this panic

By Richard J. Grant

Are you worried about your portfolio allocations? Are you worried about the value of your home? Then you should worry about the value of your home's home. If you live near me, that means the USA.

It seems fairly easy to teach people how to handle their portfolios. But many still panic when the markets turn down, and they suffer for it. By contrast, it is far more difficult to teach people how to take care of their country. But when they panic at election time, we all suffer.

Too many people believe all the current nonsense about "market failure" or the "failure of capitalism." Educational failure would be closer to the mark. The cause of the current financial panic is the many years of government interference in our businesses and private lives. At best, when government takes our resources, it gives us services worth about half what the private sector would have given us. What government takes from us is no longer available for investment, production, innovation or charity. Every such loss puts us further behind. Opportunities slip away — forever.

Congress abuses power
Congressmen love to be photographed giving checks to local groups and projects. What never get photographed are all the lost opportunities, the wealth never produced, the lives not saved. All these are lost because of the excessive power of Congress to transfer wealth from those who produce it to those whom congressmen favor. Just as often, political favors take the form of regulations that give one group advantages over another. Markets are distorted by governments, not by nature.

When we bring our products and services to market, we often succeed and sometimes fail. Either way, we learn something: what to keep doing, and what to stop doing. Both types of information are important to guide us in the stewardship of our resources. Through free interaction in the market, we are able to discover information about the reality around us that we could never otherwise learn. Government has no such discovery mechanism. That is why countries with more interventionist governments are much poorer. Markets correct themselves; governments compound their own errors and then blame the market.

The current financial mess is the result of erratic monetary policy, perverse tax laws and a complex network of regulations that is both excessive and actively distorting. Even in the face of this, markets are self-correcting. Of government failure, markets are merely the messenger. Will we now shoot the messenger?

In our panic, will we now run to Mommy, to bigger government? Will we do the political equivalent of buy high and sell low? The worst investment decision that most Americans will make this year is to vote for Obama. With their presidential and congressional votes, Americans now seem likely to increase the numbers and powers of the same people who really got us into this mess. So much for truth, justice, and … whatever.

Richard J. Grant is professor of finance and economics at Lipscomb University.

Copyright © Richard J Grant 2008