Opinion from a Libertarian ViewPoint

Political Paternalism, Not Free Markets, Cause Economic Shocks

Posted by M. C. on May 2, 2022

by Richard M. Ebeling

One of the political paternalist tricks is to insist that any economic policy failure is more “proof” of the bankruptcy of the market economy. Once again, this worn-out device is employed by Columbia University professor and Nobel Prize-winning economist Joseph E. Stiglitz. Any and all such presumed market “failures” are placed by Stiglitz under the umbrella term, “neoliberalism.”We are facing the consequences of the interventionist and regulatory state.
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Neoliberalism has become one of the most elastic terms in the political paternalist lexicon. It amounts to whatever the paternalist dislikes or to any interventionist welfare-state policy that has turned out badly from his own point-of-view, but which cannot be admitted to have been caused by some aspect of his own policy agenda. Never having to say you are sorry for your own social engineering failures is central to this mindset.

In a recent article at Project Syndicate, Stiglitz calls for “Shock Therapy for Neoliberals.”(April 5, 2022). He insists that for the last several decades. America and indeed the world have been caught in the mesmerizing grip of the idea that free markets work. And even worse, the free-market ideology has guided and directed U.S. economic policy from Ronald Reagan to the present.

This may come as a surprise to some who lived through the Bill Clinton and Barack Obama administrations and considered especially Obama’s to be committed to a fairly “progressive” agenda, a capstone of which was the (un)Affordable Care Act and its many false promises. In addition, for many limited-government conservatives and classical liberals, the two Bush administrations, along with Donald Trump’s, seemed far from any noticeable free-market agenda as well.

Stiglitz says recent crises all caused by neoliberalism

Stiglitz points, in particular, to the financial crisis of 2008-2009, the coronavirus crisis of the last two years, and now the war in Ukraine as all examples of the failure of free market-based neoliberalism to be able to steer clear of instability and to restore and maintain economic balance. In Stiglitz’s reading of 21st-century history, you would never know that for the five years before the financial crisis of 2008, the Federal Reserve had artificially manipulated key interest rates down to near zero and, when adjusted for inflation, were actually in the negative range for most of that time. This had been made possible with a nearly 50 percent increase in the money supply (M-2) during this half-decade.

Matching this had been a heavily government-created housing boom. Two federal agencies, Fannie Mae and Freddie Mac, had guaranteed and bought up huge portions of the home-mortgage market. The private sector home-mortgage lenders were told by Fannie Mae and Freddie Mac that they could loan with reckless abandon, with these agencies bearing most or even all the risk if any home loans went delinquent or general bad times were to set in. Fannie Mae and Freddie Mac ended up “covering” about half of all the outstanding mortgages in the United States.

The financial and housing crisis of 2008-2009 had been made in Washington, D.C. The instability and discovered imbalances in the financial and housing markets had on them the fingerprints of the Federal Reserve System and the federal agencies that created the “moral hazard” of unsustainable home mortgages once the bubble burst. A free market had nothing to do with it because these markets were (and remain) hostages of governmental control and manipulation. (See my article, “Ten Years On: Recession, Recovery and the Regulatory State”.)

Coronavirus crisis was made by restrictive government planning

Turning to the Covid-19 disaster of 2020, Stiglitz refers to the U.S “economies’ lack of resilience. America, the superpower, could not even produce simple products like masks and other protective gear, let alone more sophisticated items like tests and ventilators.” I fear that Stiglitz is starting to suffer from short-term memory loss, at least when it comes to economic policy. It is only two years since the federal and state governments decided to follow the Chinese totalitarian model of extensive lockdowns and shutdowns in the attempt to stop the spread of the virus. This brought production and employment to a grinding halt over many parts of the American economy. It was a perverse system of government central planning designed to bring society to an intentional standstill to assure no one came closer than six feet from any other human being.

Furthermore, it was the Centers for Disease Control and Prevention (CDC) and the Food and Drug Administration (FDA) that brought about the delays and hindrances to entrepreneurially innovative responses to the medical crisis. These government agencies prohibited private enterprises from marketing improvised, but no less effective, substitutes for more standard ventilator equipment, face masks, hand sanitizers, and testing kits.

No matter how serious the medical and related healthcare and equipment shortages, nothing could be supplied without the slow-motion approvals of the restrictive regulatory gate-keepers. More lives were put at risk or lost, medical needs were left unsatisfied for a longer period of time, and human suffering and anxiety were increased precisely because resilient and robust competitive market responses to the coronavirus crisis faced the impenetrable and shut doors of the American regulatory bureaucracy for many months in 2020. (See my articles, “To Kill Markets is the Worst Possible Plan” and “Leaving People Alone is the Best Way to Beat the Coronavirus“and “The Conquest of America by Communist China“.)

War and government sanctions are causing new disruptions

See the rest here

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