Monday, December 21, 2009
Analysis of Current Michigan Public Policy, written by Dr. Timothy Nash and Dr. Keith A. Pretty for the Ash Institute at Harvard University.
Below you will find some interesting solutions for troubled state economies like Michigan. Your thoughts and input and welcome and appreciated,
Published by the Harvard Kennedy School, Ash Institute for Democratic Governance and Innovation
November 16, 2009
The following is a public policy position paper on the Michigan economy written for the
Ash Institute at Harvard University. This is one in a series of papers published by the Ash
Institute regarding potential public policy solutions to the economic and political problems
facing key states across the country.
Analysis of Current Michigan Public Policy
By Timothy G. Nash and Keith A. Pretty
As of October, 2009, Michigan had a projected budget shortfall of $2.8 billion for the
current fiscal year. In recent history, the governor and Michigan legislature have used tax
increases and service cuts as the primary approach for putting its fiscal house in order. The
following are five policy suggestions Michigan’s political leaders should consider to help
the state become more efficient and more effective.
Five Policy Suggestions
1. The tax structure in Michigan is not friendly to business and must change.
According to the Public Policy Institute of New York, Michigan ranks 48 out of 50 states in
terms of its corporate tax burden. Michigan needs to reduce its top marginal corporate
income tax rate from 9.01% to 5% or less and eliminate the 22% surcharge on the
Michigan business tax.
2. Michigan has the highest unemployment rate in the country at 15.2% and was
ranked last in economic performance by the American Legislative Exchange Council for
2009. Michigan needs to encourage labor policy that gives those employed the right to
decide whether to financially support or join a union while giving employers more freedom
to hire employees that best fit their needs. This is imperative given Michigan has lost more
than 750,000 jobs since 2000 and needs to create a more entrepreneur friendly
3. The state has 637,000 people holding public sector jobs making government the
largest single source of employment in Michigan. The Michigan economy will lose more
than 291,000 jobs in 2009 with most coming from the private sector. A 10% reduction in
public sector jobs would fuel increased innovation in government while providing
substantial cost savings to the state economy.
4. The Detroit Regional Chamber of Commerce has argued for more than a year that
the Michigan state government can realize more than $800 million dollars in savings
annually by a) privatizing prison functions like food services and b) normalizing
sentencing and parole guidelines to those of other Midwest states.
5. Change the retirement system for Michigan K‐12 public school teachers from a
defined benefit plan to a defined contribution plan. Under such a system the state would
match teachers’contributions at a set rate with the pensions owned and controlled by the
teachers and managed by a private company. Over time, the state would exit the pension
business for teachers and not have to back-fund the pension program.
Given the ongoing fiscal crunch facing state and local government, innovative practices
must be part of the solution. Michigan House Speaker Andy Dillon’s proposal to pool health
care for all state employees is a good start. The five reforms outlined above would serve as
a strong foundation for a state government that makes the most of its limited tax dollars.
Dr. Keith A. Pretty is president and CEO of Northwood University and Dr. Timothy G, Nash
is a vice president and holds the Fry Chair in Free Market Economics at Northwood
You can read more of our white papers here.
Wednesday, December 16, 2009
Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies by Richard M. Ebeling
Arguing that there was no reason to fear significant price inflation for the foreseeable future, the Open Market Committee also told that it was continuing to inject more Federal Reserve-created money into the financial markets as it finishes buying up by the end of March 2010 a total of more than $1.5 trillion in mortgage-backed securities and related debt held on the books of Fannie Mae and Freddie Mac.
Virtually all commentaries about the Fed’s announced policies focus on whether it is too soon for the Federal Reserve to raise interest rates given the state of the economy, or whether the Fed should already be raising interest rates to prevent future price inflation.
What is being ignored is the more fundamental question of whether the Fed should be attempting to set or inﬂuence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much.
Market-Based Interest Rates have Work to Do
In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price inﬂuences consumers to buy more or less of a good. And ﬁnally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.
Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.
Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.
There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.
Central Bank-Caused Imbalances and Distortions
In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.
Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.
The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inﬂation and an initial investment boom, both of which are unsustainable in the long run. Price inﬂation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.
The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.
The unsustainability of such a monetary-induced investment boom has been shown, once again, to be true in the latest business cycle. Between 2003 and 2008, the Federal Reserve increased the money supply by at least 50 percent. Key interest rates, including the Federal Funds rate and the one-year Treasury yield, were either zero or negative for much of this time when adjusted for inflation. The rate on conventional mortgages, when inflation adjusted, was between two and four percent during this same period.
It is no wonder that there emerged the now infamous housing, investment, and consumer credit bubbles that have now burst. None of these would have been possible and sustainable for so long as they were if not for the Fed’s flood of money creation and the resulting zero or negative lending rates when adjusted for inflation.
The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands.
This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of uncredit worthy borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac. Why not extend more and more loans to questionable homebuyers when the money to fund them was virtually interest-free thanks to the Federal Reserve? And why not package them together and pass them on to others, when Fannie Mae and Freddie Mac were subsidizing the risk on the basis of the “full faith and credit” of the United State government?
More Monetary Mischief in the Post-Bubble Era
What has been the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September and December of 2008, the monetary base (currency in circulation and reserves in the banking system) exploded by 82 percent, from $905 billion to over $1.6 trillion. And over the last 12 months, from December 2008 to November 2009, the monetary base has continued to increase by an additional 18 percent to over $1.9 trillion.
At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 12 percent in calendar year 2008, and has continued to increase by 5 percent in 2009. Monetary aggregates like M-2 have not expanded even more in the last year due to the fact that about $1 trillion of the monetary base created by the Federal Reserve is sitting as excess reserves.
Why haven’t banks lent out this huge amount of newly created money? Partly it is due to the fact that after the wild bubble years, many financial institutions have returned to the more traditional credit worthy benchmarks for extending loans to potential borrowers. This has slowed down the approval rate for new loans. (For trying to once again follow some of these more responsible lending practices, President Obama has been criticizing the banks for failing to once more expand loans to potentially overly risky business and investment ventures.)
But more importantly, those excess reserves are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health care costs, the burden of the Federal debt and other government unfunded liabilities (Social Security and Medicare), as well as other possible political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle with Ben Bernanke has seemed the more profitable way of using all that lending power.
Even under the heavy-handed intervention of the government, markets are fundamentally resilient institutions that have the capacity to bounce back unless that governmental hand really chokes the competitive and profit-making life out of capitalism. Any real recovery in the private sector will result in increased demands to borrow that would be satisfied by all of that Fed-created funny money currently sitting idle. Once those hundreds of billions of dollars of excess reserves come flooding into the market, price inflation will not be far behind.
But even before the private sector may wish to significantly increase their demand to borrow to undertake new investment, the funding of the trillion-dollar a year Federal deficits may end up using a good part of those excess reserves. Then those hundreds of billions of Fed-created dollars will enter the market to finance all of the government’s spending that taxes are not paying for.
Central Banking as the Problem, Not the Solution
At the heart of the problem is that fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources – land, labor, capital – are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?
Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.
Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from their interventions, regulations and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.
Monday, December 7, 2009
If there is one label more than any other that principled advocates of individual liberty are often stamped with it is that they are “extremists.” How can you be so extreme, it is said, what is wrong with a compromise between personal or economic freedom and some “reasonable” degree of government regulation, welfare legislation, and social intervention?
The first response that should be given when confronted with such an accusation is to inquire, with what is the friend of liberty being asked to compromise? The real answer, of course, is that the friend of liberty is being asked to compromise with the use of coercive force in human relationships.
Freedom or Coercion in Human Affairs
The simple fact is that human association may be based on peaceful and mutually beneficial agreement and exchange, or it may be based on one party in this human relationship threatening or using force to make the other party do something that he would not willingly do if he were free from the danger of violence.
Freedom is important not because a person might want to say, “yes,” to an offer that has been made to him, but because he might want to say, “no.” If an individual cannot say “no” without being threatened with some form of physical harm from the other person in the relationship, then that individual is not free.
Being a slave is to be required to do what someone else wants without one’s voluntary consent. It is to be coercively made the means to another’s ends or goals. That individual’s life is no longer his own. Instead, to the extent that he is made to serve the ends of another without his voluntary consent he is no longer a free man, but rather the property of another to be used as the slave-master wishes.
Often when the friend of freedom gives this reply he is accused, again, of going to extremes. But who, in this debate over freedom and coercion, is the actual extremist and who is the actual moderate? The advocate of state coercion in social affairs cannot stand the fact that people make choices, and undertake courses of action, of which he disapproves. He objects to the fact that people fail to follow the paths that his reason and values consider rational and good. Everything else is either chaotic or sinister.
The Social Engineer as Political Madman
In this sense, he is like the maniac of whom G.K. Chesterton speaks in his book, Orthodoxy. The madman, Chesterton says, is the one "who has lost everything except his reason.... He is not hampered by a sense of humor or by charity, or by the dumb uncertainties of experience. The madman's explanation of a thing is always complete, and often in a purely rational sense satisfactory." The madman has a "most sinister quality" of "connecting of one thing with another in a map more elaborate than a maze."
The advocate of state coercion has, in this sense, been driven mad by the outcomes of a free society. If some men are poor while others are well-to-do, he cannot accept the idea that this is due to the natural scarcity of resources, or is merely as far as capitalism has yet been able to raise people's standards of living in an on-going and time-consuming process of savings and investment. No, it must be because men have not submitted themselves to a plan — his plan — that his reason has given him, and not others, the superior wisdom and insight to see.
If some men receive lower pay than others, or do not have access to all the goods and services they desire, the advocate of state coercion — like the madman — often sees sinister motives and dark conspiracies. If some workers receive lower wages, it can't be because of a lack of marketable skills or insufficient personal ambition to better themselves. No, it must be because of the businessman's greed and unwillingness to pay "a fair wage," or a plot among the employers to exploit their fellow human beings. The advocate of state coercion can see beneath the charade and he, of course, knows the regulation or intervention to put the conspirators in their place and remedy the problem.
The social madman has the answer and the solution for everything. He has no patience for ignorance, good intentions that go astray, or some natural scheme of things. And like the madman, he has no doubts about his knowledge, the goodness of his intentions and their outcome, or what the scheme of things should be turned into. Human freedom and its advocates are the irritants that he tolerates when he has to, but with which and with whom he never compromises. He has too much confidence in his own vision. In his mind, extremism in the defense of the state-molded "good society" is no vice.
Smoking and the Political Extremist
Let me try to explain this with two issues that have dominated social policy in the Western world over the last several years. The first one is the growing ban on smoking in virtually all public and private areas. In the “bad old days” it was taken to be common courtesy and good manners to ask others in an enclosed space if they minded if he, the smoker, wished to light up his cigar, cigarette, or pipe. If there were any objections, the smoker would either refrain or move to another place to enjoy his nicotine fix. Sometimes, non-smokers would be, in turn, well-mannered enough not to object if the smoke was not too much of a nuisance.
The antismoking advocate just cannot reconcile himself to the existence of others who gain pleasure from something of which he disapproves, and by people who weigh the enjoyment of the present more highly than the possible consequences of health problems in the future. Nor can he stand a world in which the market provides options to those with different preferences: restaurants, bars or other public places in which the proprietor may see the economic benefit of providing both smoking and non-smoking facilities, including ones in which some such places are completely smoke free while other places permit unrestricted smoking.
For the advocate of freedom, the market alternative is precisely the reasonable and moderate one. It recognizes and accepts the varieties and preferences among men and offers a compromise, a peaceful resolution, of the differences among them. And it leaves a wide avenue open for one group of men to reason and persuade another to modify their choices and forswear "a filthy and corrupting" habit.
Religious Tolerance vs. the Politically Closed Mind
Another example is religious tolerance. For centuries in Europe, kings and governments did not tolerate religious diversity. Those who dared to confess and practice a faith differing from that of the monarch or the political authority were threatened with imprisonment, exile, or even torture and death. It took hundreds of years and numerous religious wars before men where willing to leave religious faith, or no faith, to the conscience of each member of society.
In the liberal society that slowly evolved during the last few centuries in the West it came to be accepted that religion was a private matter and not “an affair of the state.” Debates, disputes, and even heated argument over religious matters were to be left to the free marketplace of ideas. Conversions and “crusades” for the acceptance of the “true” faith were only to be fought on the battlefield of the mind and the spirit, and not at the end of the hangman’s rope.
But now there has arisen a new political intolerance against any public demonstration for or stated disagreement with a particular religious faith. Religious views are to be locked away in the believer’s mind, and any public expression of his faith is considered somehow to be imposing that belief on others. Thus, if a private business establishment chooses to exhibit a religious symbol on its own property (and even if many of his customers desire or agree with it), it is increasingly considered grounds for legal suit and legislative prohibition.
At the same time, if the proponent of one faith declares his disagreement or disapproval of another faith this, in turn, is considered an act of religious “intolerance” that is to be regulated or legislated against as a supposed “hate crime.” Thus, in the name of religious “tolerance” governments are increasingly becoming intolerant of any individuals or private groups that express their differences and disagreements with other belief systems in that marketplace of ideas. A new form of religious censorship is being imposed on people of every faith.
The New Religious Intolerance vs. the Marketplace of Ideas
The most recent publicized instance of this new intolerance has been the firestorm of controversy that followed publication of the Danish newspaper cartoons, which portrayed Mohammed in an unflattering light. When some foreign governments and domestic pressure groups called for the censorship and punishment of those who published the cartoons, the liberal reply should have been that law and politics have no place in this matter. One might question and even personally challenge the good manners or polite taste of those who published them, but this is all part of the peaceful rivalry of ideas in which both the vulgar and the refined compete for the attention and acceptance of the reading and thinking public.
When I was a small boy I was taught that when someone said something rude or insulting to me the appropriate response was, “Sticks and stones may break my bones, but words can never harm me.” Now, of course, words can and do hurt, and precisely because of this decent men in a free society should show a reasonable moderation in what and how they say things. And, indeed, it used to be taken as more of a demonstration of the “crudity” and “ignorance” of the speaker that he should rise no higher than the gutter in what he said and how he acted toward another.
But, instead, the intolerant, political extremist wishes to ban what he considers the religiously “insensitive” and what he labels “word harms” and therefore crimes. Does this settle disputes among men about matters of religious faith (or any other idea or belief)? No, this new political extremist intolerance for private religious expressions of faith and differences of views in the public arena threatens to potentially make social tensions even worse over this issues.
It makes people fearful of speaking their minds, forces them into a public hypocrisy, and allows differences and disagreements to fester below the surface. And by driving men’s thoughts “underground” it generates a “black market” place of ideas where the truly corrupt, vile, and dangerous can grow and mutate precisely because they are not challenged in the bright light of open and public discourse and debate.
The advocate of freedom, with his deep belief in the sanctity and uniqueness of the individual, has always been repelled by the idea of condemning or punishing people because of the values or beliefs that they may hold but which they do not attempt to forcibly impose on others.
The friend of liberty has believed that all ideas should be treated with respect and can only be discussed and challenged on the basis of reason and evidence. Attempts to politically discriminate against or ban open and free discussion of any ideas are the only things that should to be viewed as unreasonable and intolerable in the free society.
Liberty and a Society of True Tolerance
The free society tries to avoid extremes through the diversity of free men that it
both permits and fosters. It restrains the practice of "extreme" personal behavior because it imposes costs and consequences upon everyone who practices them — loss of economic opportunity, and social ostracism by those who are repelled by it. And it teaches the advantages of moderation — courtesy, good manners, tolerance and "socially acceptable" conduct – in the competitive arena of intellectual pluralism where to win an argument the only medium of exchange is peaceful persuasion.
In other words, the free society nudges men toward better behavior and rational thought rather than tries to compel it. It teaches good and tolerant conduct through reason and example. It fosters compromise by demonstrating the personal costs of being too extreme in one's words and actions. And it raises the ethical conduct of society by the discovered advantages of personal improvement through time.
Are the arguments for and the advocates of liberty too extreme? Quite to the contrary. Freedom is the epitome of moderation. And it is freedom's moderation, its tolerance and diversity that drive some men mad. But madness, by definition, is not the normal condition of a healthy human being. The history of Western civilization is the story of man's slow escape from the madness of political and social extremism. Our dilemma and our challenge is that this sickness still controls the minds of too many of our fellow citizens, and is the guiding principle of those who use political power to get their way.
Tuesday, December 1, 2009
We are dangerously returning to “the road to serfdom” that free market, Austrian economist and Nobel Laureate, Friedrich A. Hayek, warned about in a book with that title that was originally published in 1944. A spider’s web of regulations, controls, and commands were imposed on the free enterprise system at that time, first under the crisis conditions of the Great Depression and then expanded in Great Britain and the United States during the emergency years of the Second World War.
Hayek feared that with this growth in government control over the economic affairs of the nation, individual freedom was being seriously threatened. He argued that with government commands over production, pricing, and resource use there inevitably came government control over peoples’ lives.
“We, the People,” or Government Control
The vital issue, Hayek insisted, is whether “we, the people” decide what shall be produced and for what purposes based on what we think goods and resources are worth through the free interplay of supply and demand in a competitive free market; or whether it shall be those in political power who will increasingly dictate through those commands, controls and planning regulations what we, the citizens of the country, should have available to use and consume, in what quantities and qualities, and for what purposes and at what costs.
At least in America and some other Western nations, Hayek’s warning was partly heeded. Neither the United States nor the rest of the Western world ever fully reversed the extent to which governments had grown in size and intrusiveness in the 1930s and 1940s. But they did step back and did not follow either Nazi Germany or the Soviet Union all the way down that road to serfdom under which individual freedom is completely crushed and each human being is reduced to a mere expendable cog in the wheel of state planning and power.
Unfortunately, over the decades since the Second World War Western governments have continued to incrementally encroach on people’s liberty through the expansion of the Interventionist-Welfare State. Taxes have increased, regulatory powers have expanded, and redistributive programs have grown so much that many in America and Europe truly believe that they have an “entitlement” to other people’s income and wealth.
Economic Crisis and Massively Growing Government
But it is under the cover of the current economic crisis, that this growth in government power and control is accelerating at a gravely dangerous pace. If this trend is not halted, we once again seem headed down that road to serfdom about which Hayek warned more than six decades ago.
Starting in 2008, Big Brother in Washington has been poured hundreds of billions of dollars into various sectors of the U.S. economy. With these dollars have come more and more government control and influence over the private enterprise system.
In the autumn of last year, the Bush Administration decided to spend nearly $700 billion in the American financial sector to prop up banks and other lending institutions facing either insolvency or in some cases bankruptcy, under the argument these corporations were “too big to fail.” In exchange for these vast sums of bailout money, the U. S. Treasury took partial stock ownership over many of the leading banks and financial institutions in the United States.
Now, under the guise of being the steward of the taxpayers’ money, the Obama Administration has appointed a “pay czar” who has been imposing wage controls on the salaries to be received by senior executives employed in these financial institutions.
In addition, the regulatory reach of the Federal government and the Federal Reserve System is being extended to more closely oversee and determine the types of risk management and lending strategies banks and investment houses may be allowed to follow in the years ahead. The capital markets of America are threatened with even far more politicization of investment decision-making than has been the case in the past.
More than $80 billion of taxpayers’ money has been spent in an attempt to prop up the declining American automobile industry. In the process, ownership over General Motors has been turned over to the United Auto Workers Union, with Uncle Sam as a powerful voice in the background influencing the future technology and production direction of the American auto manufacturing. After three Washington bailouts, now, since the 1970s Chrysler has been merged with Fiat, with the government still serving as a backseat driver.
The $820 billion cap-and-trade bill wanted by the Obama administration would basically nationalize the entire atmosphere over the United States, with the government selling and assigning permits dictating the amount of emissions that may be associated with every type of manufacturing in the U.S. With this power, those in political authority in Washington can determine not only the technologies with which every private enterprise in America can undertake any form of production, but will be able to decide who will be allowed to stay in business, as well as what they produce and for what purpose.
It will represent a crushing stranglehold over all of the county’s industry that will also be extremely expensive for the buying public. It has been estimated that within a decade or so, the higher costs of manufacturing due to cap-and-trade will raise by at least $3,000 a year the consumption expenditures of the average American household.
And to top all of this off, the Congress is now in the process of very well passing what will amount to the virtual nationalization of the entire health care industry in America. The government will dictate even more comprehensively than it already does the medical fees and treatments that will be available to every single American citizen. The price tag for having this dubious government bedside manner is estimated to be around $1 trillion and rising over the next decade.
There will be government rationing of a widening circle of medical services and facilities. There will be increasing government regulatory controls over the availability of pharmaceuticals for various diagnosed diseases. There will be political determination of who lives and who dies based on government actuarial judgments concerning the elderly, the young, and the chronically ill. It will not be patients and their doctors who will have the greatest influence and control over this most personal and intimate matter. Rather, it will be pressure group politics and expected voting patterns in upcoming election days that will determine what a particular life is worth in terms of government dollars allocated out of the Federal budget.
Human Diversity or Government-Imposed Uniformity
The essence of a free enterprise society is that each individual has the personal liberty to determine his own goals, weigh the costs of achieving the various ends he values, and make the personal trade offs that he considers worthwhile, given what he would like to do so his life has meaning and fulfillment.
But as Hayek also warned many years ago, as the government takes over control of more and more aspects of our life the more we are confined within and made to conform to the hierarchy of values and goals that the political authorities are determined to impose on each and every one of us. By taxing way our income and wealth, and by dictating what may be produced and to whom it will be supplied, the government reduces the members of society to a homogeneous mass made to fit the mold that the political elite thinks is best for us.
Gone is the diversity and pluralism of human difference that is usually considered one of the hallmarks and benefits of the open and free society. We all become interchangeable parts of an economic plan designed by others to reflect their conception of “fairness” and “social justice.” The death of individual liberty is the end point of our new road to serfdom under which we are reduced to subservient and obedient subjects of our political masters.
The Rationality of the Market vs. Government Chaos
There is another equally dangerous dimension to this growth in government and the resulting destruction of economic liberty and the free market: the loss of any rationality to the working of the country’s entire economic system. As Hayek and his fellow Austrian economist, Ludwig von Mises, cogently argued, without a competitive pricing system based on the free play of supply and demand, there is no way of knowing whether the scarce resource of the society are being utilized in the most economically efficient manner.
Market-based prices serve as the information steering mechanism to determine how resources, labor, and capital should be allocated among all the alternative and competing uses for which they may be applied to manufacture desired goods and services.
President Obama’s “pay czar” has dictated the maximum cash salaries that may be paid to senior executives in the part of the financial sector in which the government has a stake. This means that the use of executive talent will be irrationally employed in this part of the economy. Unless people may freely convey on the market what they think someone’s abilities and talents are worth as expressed in the wage they are willing to pay that person to perform a valuable service, the right people will not be performing the right job in the right place. There will be mismatches between work to be done and the best person assigned in the market to get it accomplished.
Now extrapolate that to the entire economy and the use all types of labor, land, resources, and capital equipment. The government will then be mandating, manipulating and distorting the pricing system though controls, regulations, and artificial subsidies for more and more of all the things people want in society, whether it be health care, automobiles, a functioning financial sector, or all types of manufactured goods.
The end result is a dysfunctional economy with growing waste, inefficiency, and imbalances between supplies and demands for various the goods and services desired by all of us as income earners and consumers. The profit motive is undermined, the incentive for innovation is weakened, and improvements in material prosperity are slowed down and in the extreme finally may grind to a halt.
Prices have work to do. When government commands and controls replace the free price system generated by peaceful market competition, people not only find themselves reduced to a new form of serfdom but discover they are living in a world that Ludwig von Mises once called politically created “planned chaos.”
This is a very high price to pay for the false promises of political paternalism and the illusionary security of the welfare state. Liberty and prosperity are too precious to trade away even during the emotional times of economic crisis and uncertainty.
Our task must be to reason with our fellow Americans before we have traveled so far down that new road to serfdom that it becomes almost impossible to turn back.