The Economy: When Will We Learn?

Congress, the President, the President to be, the Treasury Secretary and the leaders of the world are all scrambling to find a way to fix the economy. Bank bailouts, auto maker bailouts, bailouts of city and state governments, incentive packages and more are on the table and cost seems to be no concern. We are on the way to spending a full trillion dollars, as in one thousand billion or one million million dollars, in a very short time and talk is that the total amount spent on bailing out the economy might reach 1.5 billion. That means that in a little over a year our government will hand every man, woman, child and infant in the U.S. a $5,000 increase in debt. That will bring the total debt to something over $35,000 each or $140,000 for the average family.

History tells us that such intervention in the economy does little. If it did, Russia would have prospered instead of collapsing. The records show that the great social economic programs of President Roosevelt during the great depression did nothing to bring the economy out of the dumps. In fact, the evidence is that it only lengthened the depression and drew out the suffering. The one thing that drew the country out of the depression was the outbreak of was throughout the war that forced nations to drop trade barriers, spurred international trade and created a demand that only the U.S. could fill.

Government intervention such as we are experiencing suffers from the same basic flaw that has, over the years, killed most centrally planned economies, be it in Communist Russia, China, or those of South America. All have failed. One could argue that the Chinese are an example of one that thrives but the fact is that they are unique in that the Chinese have changed their economy and are walking the tightrope between strong social and political central control and allowing the business world to practice capitalism. The tightrope is that it is hard to grant economic freedom and restrict political, religious and social freedoms. Once the taste of freedom is granted, the appetite is unlikely to be sated without more of it.

The problem with centrally planned economies is that the government cannot react to the many vague and numerous needs and changes of an economy. That is always its downfall. Communist Russia decided to put its investment in test tubes in the early 50s. As a result they missed the move to microchips and fell decades behind the U.S. in technology. The U.S. government did not plan the move. Thousands of competing interests in the market place fought for their piece of pie and the best technology won out. The genius of capitalism is the test of the market place. With many different competing interests, the battles are fought out on a small scale throughout the economy. When one interest gains an advantage, others flock to it while still others try to improve on it or find something better, for their own advantage. The result of this is a market that responds to the changing needs of society, changing technology, and changing tastes. The failure of centrally planned governments is the inability to recognize changes and their stubbornness in protecting the status quo.

Such is the problem with our bailout plans by the government. It is one central authority trying to do what it thinks best and most of the time it will get it wrong. It will fail to factor in the many inputs of the market place, competing interests and changes in need and abilities. The market place takes care of these. It does so by creating losers and winners. The losers go on to something else and quit wasting assets on a bad idea. The winners build on their success and their good idea spreads. With the government, a bad idea is usually perpetuated, even if recognized. It has no market place feedback and is too often swayed by non market political forces.

A good example is the recent move by congress to fund bio fuels. If the idea of turning corn into fuel was a good one, the market would have rewarded those who moved in that direction. It did not, so the growers of corn went to the Congress. Congress responded with government subsidies of over $1.00 per gallon for corn based fuel. The result is not only inefficient use of corn for fuel, but the unanticipated steep increase in food costs. Corn being a basic staple, used both as an ingredient in many products and as feed for animals, was soon in short supply and the shortage and price increase still affects us all. Not only are we paying businesses over $1.00 per gallon to produce fuel we don’t want, but shortages and increases in the food market have raised the cost of living for us all and have caused starvation and food riots in third world countries. People are dying because Congress acted … badly.

Now they want to bail out the automakers. This is an industry which has helped dig its own grave. First they took their consumers for granted until the Japanese came in and taught us what quality is. The companies and unions continue to be unrealistic as to what their labor is worth. An unskilled line worker can cost as much as $160,000 annually. Quality and efficiency improvements are often put off because management and labor cannot come to agreements. Any bailout would likely only put off for a few years the collapse that is bound to happen unless the industry decides to truly reform itself. Currently the union and management are fighting for a larger piece of a pie that is quickly disappearing. It should not be up to us to bake them another to be greedy over.

The market place will correct the current problem, if it is left alone. There will be losers, but there will be winners as well. A correction will occur and a new point of stabilization reached. Then we will move forward. Intervention is likely to protect some powerful business and union interests now while prolonging the pain suffered by the majority. It will likely put money where the problem no longer lies and as a result, further distort the economy and cause further problems. We think we have to do something to fix the problem but the reality is that we should let the problem sort itself out.

This is not to say that the government has no role. It does and it is critical. The government should see to it that the markets work, that information flows freely, that no unfair advantage is gained by ill begotten means, and that the infrastructure that makes the economy tick remains healthy. It should protect deposits made to legitimate institutions with legitimate returns, but it should not bail out those who gambled to get an unfair advantage, who manipulated markets and who only looked out for themselves instead of the stakeholders they represent. It should not bail out unions that have helped management to run businesses into the ground, not should it be afraid to allow institutions to fail. Others will spring up to replace them.

The government needs to make sure we truly have fair trade and not just one sided trade. It needs to open up international barriers, both for export and imports. History has shown that only with free trade will the world economy improve. As soon as barriers start going up, economies falter. The government needs to protect us from the unscrupulous, from any lack of openness in the system, from unjust monopolies and from manipulation of markets. It should not and really cannot in the end, protect us from making bad decisions and falling victim to our own greed. A good system will always have winners or losers. What the government is doing now is saving a few from losing now, and causing us all to lose in the long run. We cannot outrun the law of economics and the debt per person is getting out of hand. Sooner or later, probably sooner, this debt will have to be paid. That bubble too is about to burst.

Father Steven Foppiano