Monday, September 29, 2008

If You Can't Take The Recession, Get Out Of Capitalism!

I generally make a habit of not posting about things that are very political because I know I tend to hold my views very strongly and that can be offensive to some people. I'm always open to someone debating my point (that's how good opinions are formed), but generally find that people end up feeling hurt after such a discussion, so in order to be nice I tend away from such conversations. However...

I am incensed that politicians are even considering this whole bailout idea. Taking taxpayer dollars (either directly through taxes or by printing more money which devalues all of the other money taxpayers have) in order to support a business is ridiculous. There are several issues here, including, even if you decide it's a good idea to artificially prop up a company with public money, who named the government "god" and gave them the right to pick and choose who lives and who dies? Or put differently, which stockholders' (read: taxpaying citizens') money will be lost when one company goes under and which will be spared at the expense of everyone else? It is completely unfair and inappropriate for the government to put itself in that position.

As with many economic occurrences, the real story isn't obvious on the surface here, you have to dig one layer deeper, or as Henry Hazlitt puts it in the great book Economics In One Lesson: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

So what is the longer-term, unseen effect of saving AIG or some other large financial institution? Business is about the balance between risk and reward. Armed with the knowledge that they are too precious to be allowed to fail, the risk-reward equation is now suddenly skewed to making risk have no cost. So, there is no future incentive not to make risky investments, leading to an ever less efficient business which should be out of business but won't be allowed to go away - like a new branch of the government: slow, inefficient, and permanant.

The broader point and the most troubling part of this "bailout" idea is this: the free market economy needs to have recessions. Recessions and companies going out of business are required for the free market system to work. Like a tree with dead branches, those failed enterprises have to be allowed to fall off and die or they will eventually make the whole body so inefficient that the whole tree will die. Now of course, it isn't any fun when you happen to work for or own stock in that company, I don't deny this. But the system requires this birth/death cycle to be allowed to happen.

So the troubling part is this: it seems to me that the bailout is thought to be necessary by politicians because no politician (especially president) wants to have a major recession on his watch. This is understandable as a method of legacy-preservation, but this has always been and will always be the case. So, if we now accept that it is acceptible for politicians to artificially prevent or lessen recessions because they don't want to be the bearers of bad news, then we have removed a part of the cycle necessary for free markets to function.

So politicians will always want to prevent recessions, but if the modus operandi is now that we deem it acceptible for them to do so using artificial means (such as this bailout), then I start to think that capitalism and democracy (with economic manipulation) are fundamentally incompatible. Capitalism needs recessions, and politicians need to get re-elected so they won't allow them. Self-preservation is necessary in politics, recession is necessary in the free market, but if self-preservation demands the lack of recessions, then the two systems are mutually exclusive and can't co-exist together. That's a problem for us.

Now, I don't think all of the blame can be placed at the feet of the politicians. The reason that they are so worried about recessions is because the population is so worried about recessions. If we understood that recessions are necessary parts of the economic cycle of a free market and weren't out to lynch whatever politican happens to be presiding over them, then they wouldn't have to be so fearful of them.

I certainly understand that recessions are difficult and create some genuinely difficult situations for familes. I'm not meaning to downplay that fact and I empathize with those situations. However, before you start thinking that we should switch to a system that doesn't have these valleys and is more steady, I'd encourage you to consider the fact that those systems, while stable, are also less beneficial for their participants than capitalism when you average together the highs and lows of a system like ours.

So capitalism does demand more from us: more patience and more creativity in getting through the tougher times, but in the end we're still better off.

The only problem with all of this theory is that it's correct up until the point where the government is artificially pushing the wealth one direction or another through earmarks and the like - which it is also doing.

The main point though is this: a free market economy dies when companies aren't allowed to.

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