Tuesday, May 27, 2008

How Government Undermines Capitalism

The remnants of capitalism are slowly withering in America, and a key reason for it is that the free market gets rapped with the blame for economic problems and dislocations caused by government policies and actions. The way this process works is as follows. The government, usually at the behest of some private interest looking to circumvent the voluntary, non-coercive principles of the free market, takes some action to interfere with and/or override the judgements of private individuals in some sphere of economic activity. This sets in motion a chain of events that leads to ever greater and more numerous controls, regulations, tax preferences, subsidies, and other actions. The initial government action, intended to “correct” some “problem” in the private sector, or to advance someone’s idea of a “good cause”, ends up creating more problems. The law of unintended consequences kicks in, in other words. This leads to the necessity for more government intrusions.

At the same time, the people who benefit from these government actions come to represent a lobby or pressure group with a vested interest in preserving, at the expense of the rest of the country, their government-created privileges. With each new government action, the beneficiary group grows in number and influence. In addition, the private judgements and decisions of individuals made with government’s distorting influence expand exponentially, steadily compounding the problem.

In other words, government interference begets more government interference, which begets more government interference…ultimately strangling the free, private sector to the point that it ultimately “fails”. The deteriorating state of health insurance, with the (non-existent) free market getting blamed, is one prime example of this. The sub-prime mess in the banking and mortgage sectors is another. And the energy situation is still another major example.

Along these lines, Ayn Rand Institute legal analyst Thomas A. Bowden has written an excellent op-ed on the 150-year chain of events leading to today’s massive, exploding government expenditures for natural disaster relief. Here are some excerpts from Mr. Bowden’s piece, entitled How Government Makes Disasters More Disastrous:

“Disasters can sometimes shock a nation into questioning entrenched practices. But Hurricane Katrina, perhaps the worst natural disaster ever to befall America, has failed to spark serious challenge to long-standing government policies that actively promote building and living in disaster-prone areas.

“The Katrina tragedy should have called into question the so-called safety net composed of government policies that actually encourage people to embrace risks they would otherwise shun—to build in defiance of historically obvious dangers, secure in the knowledge that innocent others will be forced to share the costs when the worst happens.

“Without blaming the victims for having followed their own government's lead, it is time to question whether those policies should continue.

“The first strands of today's safety net were spun in the nineteenth century, as the Army Corps of Engineers shouldered the burden of constructing and maintaining levees and other flood controls along the Mississippi River.

“Throughout the twentieth century, new strands were woven into the safety net, first in the form of loans to disaster victims, then by direct grants, infrastructure repairs, loan guarantees, job training, subsidized investments, health care, debris removal, and a host of similar rehabilitative measures.

“By gradual steps, this disaster safety net became part of the legal landscape, taken for granted by private investors and owners deciding to undertake new projects or rebuild storm-damaged areas.

“This entitlement mentality ensured that each new tragedy would generate fresh demands to expand the safety net. In Katrina's aftermath, those demands centered on State Farm, which dared to deny certain claims under homeowners policies that covered wind damage but expressly excluded floods.

“Last year, a jury inflamed by adverse public opinion awarded $1 million in punitive damages against State Farm for having stood on its contract rights in a dispute involving a single house.

“Disgusted, State Farm announced last year that it would cease writing new homeowners policies in Mississippi.

“As more private insurers withdraw from high-hazard areas—or raise their rates to reflect the staggering legal and public relations costs of offering disaster insurance—a predictable lament arises: the free market has failed, and government must fill the vacuum so that the statist safety net remains strong.”

The almost imperceptible process by which government grows and squeezes and strangles private enterprise in field after field poses a real long-term danger. Understanding how this process works is a first step toward reversing it. The difficulty in bringing about reforms lies in the fact that the maze of government regulations and controls, subsidies and tax preferences, has made so many people come to depend on the government’s policies, creating new political constituencies in the process. Every law, regulation, control, preference, etc., that government enacts quickly becomes the unchallengable given, the not to be questioned, the “progressive reform” forever closed to further scrutiny…as if they are metaphysical facts of nature rather than man-made.

Whereas the problem grew in piecemeal fashion, the solution requires a comprehensive plan. This, of course, is not very conducive to our political realities.

Never-the-less, it can be done. And it starts with identifying the problem. Mr. Bowden shows how. The growing crises in healthcare, energy, and other areas were a long time in the making. Every aspect…every government policy, tax, regulation, program, etc…must be exposed to critical analysis. What we are likely to find is that all of the seemingly isolated government acts in a whole host of areas add up to the chickens now coming home to roost.

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