That manipulation should disturb us. But contrary to Rich, it is not the work of “corporatists” who have sprung up to attack Progressive reforms proposed by Obama and the Democratic majority. Manipulation is what we got many years ago when we traded a more or less free market for the “Progressive” interventionist state. When government is big, the well-connected always have an advantage over the rest of us in influencing public policy.

Observe: Although President Obama and big-government activists demonize health-insurance companies, the companies “are still mostly on board with the president’s effort to overhaul the U.S. health-care system,” the Wall Street Journal reports.

And even though the activists criticize Big Pharma, “The drug industry has already contributed millions of dollars to advertising campaigns for the healthcare overhaul through advocacy groups like Healthy Economies Now and Families USA. It has spent about $1 million on similar advertisements under its own name,” the Times reports.

Big Business, Big Pharma, and Big Insurance

Big Pharma and Big Insurance want Obama-style healthcare reform?

It’s not so hard to understand. “The drug makers stand to gain millions of new customers,” the Times said. And from the Journal: “If health legislation succeeds, the [insurance] industry would likely get a fresh batch of new customers. In particular, many young and healthy people who currently forgo coverage would be forced to sign up.” No wonder insurers are willing to stop “discriminating” against sick people. (Forget that the essence of insurance is discrimination according to risk.)

Not that Big Pharma and Big Insurance like every detail of the Democratic plan. Drug companies don’t want Medicare negotiating drug prices—for good reason. If it forces drug prices down, research and development will be discouraged. (Depending on whom you believe, Obama may or may not have agreed with the drug companies on this point.)

As for the insurance companies, they worry—legitimately—that a government insurance company—the so-called public option—would drive them out of business. This isn’t alarmism. It’s economics. The public option would have no bottom line to worry about and therefore could engage in “predatory pricing” against the private insurers.

But despite these differences, the biggest companies in these two industries are on board with “reform.”

Horwitz’s First Law In Action

It illustrates economist Steven Horwitz’s First Law of Political Economy: “No one hates capitalism more than capitalists.” In this case, big business wants to shape—and profit from—what inevitably will be an interventionist healthcare “reform.” Can you think of the last time a major business supported a truly free market in anything?

In light of all this, it was funny to watch Democrats and their activist allies panic over the protests at the August congressional town meetings around the country. Tools of the corporate interests! they cry. But anyone opposing “socialized medicine” can’t be a mouthpiece for big business because, as we’ve seen, big business supports government control. Conservative groups may be encouraging people to vent their anger at congressmen who pass burdensome legislation without even bothering to read it, but that’s no reason to insult the protestors as pawns. What’s wrong with organizations helping like-minded people to voice their opinions? Why do Democrats, such as Speaker Nancy Pelosi, dismiss citizen participation as “AstroTurf”—not real grassroots—only when citizens oppose the kind of big government they favor?

They weren’t so dismissive when George W. Bush was president and people protested—appropriately—his accumulation of executive powers.

“When handfuls of Code Pink ladies disrupted congressional hearings or speeches by Bush administration officials,” Glenn Reynolds wrote, “it was taken as evidence that the administration’s policies were unpopular, and that the thinking parts of the populace were rising up in true democratic fashion. . . . But when it happens to Democrats, it’s something different: A threat to democracy, a sign of incipient fascism. . . . House Speaker Nancy Pelosi calls the ‘Tea Party’ protesters Nazis. . . . So when lefties do it, it’s called “community organizing.”

When conservatives and libertarians do it, it’s “AstroTurf.”

Give me a break.

Related posts:

1. Episode 13: Pelosi Health Care Bill
2. Health Industry to Gain from Health Care Reform
3. Health-Care Reform: Deja Vu All Over Again

“Choice, competition, reducing costs—those are the things that I want to see accomplished in this health reform bill,” President Obama told talk-show host Michael Smerconish back in August.

Choice and competition would be good. They would indeed reduce costs. If only the President meant it. Or understood it.

In a free market, a business that is complacent about costs learns that its prices are too high when it sees lower-cost competitors winning over its customers. The market—actually, the consumer—holds businesses accountable and keeps them honest. No “public option” is needed.

So the hope for reducing medical costs indeed lies in competition and choice. Today competition is squelched by government regulation and privilege.

But Obama’s so-called reforms would not create real competition and choice. They would prohibit them.

Competition Produces Knowledge

Competition is not a bunch of companies offering the same products and services in the same way. That sterile notion of competition assumes we already know all that there is to know.

But consumers often don’t know what they want until it’s offered, and their preferences and requirements change. Businesses don’t know exactly what consumers want or the most efficient way to produce it until they are in the thick of the competitive hustle and bustle.

Nobel laureate F. A. Hayek taught that competition is a “discovery procedure.” In other words, the “data” of supply and demand emerge only through the market process. We need open-ended competition not merely to see which rival is better, but to learn things we didn’t know before and aren’t likely to learn any other way.

“Competition is valuable only because, and so far as, its results are unpredictable and on the whole different from those which anyone has, or could have, deliberately aimed at,” Hayek wrote.

Well-meaning politicians have created untold misery by assuming they and their experts know enough already.

The healthcare bills are perfect examples. If competition is a discovery process, the congressional bills would impose the opposite of competition. They would forbid real choice.

If You Liked the Election, You’ll Love the Public Option

In place of the variety of products that competition would generate, we would be forced to “choose” among virtually identical insurance plans. Government would define these plans down to the last detail. Every one would have at least the same “basic” coverage, including physical exams, maternity benefits, well-baby care, alcoholism treatment, and mental-health services. Consumers could not buy a cheap, high-deductible catastrophic policy. Every insurance company would have to use an identical government-designed pricing structure. Prices would be the same for the sick and the healthy.

In this respect, it wouldn’t matter whether Congress created a “public option”—that is, a government insurance plan. In either case, bureaucrats would dictate virtually every aspect of the health-insurance business.

What Obama says in favor of a public option tells us how little he understands competition. The public option’s virtue, he told Smerconish, is that “there wouldn’t be a profit motive involved.” But as contributing editor Steven Horwitz, a professor of economics at St. Lawrence University, wrote in The Freeman, profit is not just a motive. Profit (along with loss) is what enables competition to perform its discovery role:

“Suppose for a moment that we try to take the profit motive out of health care by going to a system in which government pays for and/or directly provides the services. . . . For many critics of the profit motive, the problem is solved because public-spirited politicians and bureaucrats have replaced profit-seeking firms.

“Well, not so fast. By what method exactly will the officials know how to allocate resources? By what method will they know how much of what kind of health care people want? And more important, by what method will they know how to produce that health care without wasting resources? . . . In markets with good institutions, profit-seeking producers can get answers to these questions by observing prices and their own profits and losses in order to determine which uses of resources are more or less valuable to consumers. . . . [P]rofits and prices signal the efficiency (or lack thereof) of resource use and allow producers to learn from those signals.”

Profit is the key to competition. Anyone who claims to favor competition but looks down at profit has no idea what he is talking about.

Related posts:

1. Competition Would Save Medicine, Too
2. Medical Competition Works for Patients
3. Antitrust Protects Competition? It Just Ain’t So!

Yet that is what some members of Congress presumed to do. They intended, as the New York Times put it, “to reinvent the nation’s health care system.”

Let that sink in. A handful of people who probably never even ran a small business actually think they can reinvent the healthcare system.

Politicians and bureaucrats clearly have no idea how complicated markets are. Every day, people make countless tradeoffs in all areas of life based on subjective value judgments and personal information as they delicately balance their interests, needs, and wants. Who is in a better position than they to tailor those choices to best serve their purposes? Yet the politicians believe they can plan the medical market the way you plan a birthday party.

Leave aside how much power the State would have to exercise over us to run the medical system. Suffice it to say that if government attempts to control our total medical spending, sooner or later, it will have to control us.

Also leave aside the inevitable huge cost of any such program. The administration has estimated $1.5 trillion over ten years with no increase in the deficit. But no one should take that seriously. When it comes to projecting future costs, these guys may as well be reading chicken entrails. In 1965, hospitalization coverage under Medicare was projected to cost $9 billion by 1990. The actual price tag was $66 billion.

The sober Congressional Budget Office debunked the reformers’ cost projections. Trust us, Obama says. “At the end of the day, we’ll have significant cost controls,” presidential adviser David Axelrod said. Give me a break.

Who Knows Best?

Now focus on the spectacle of that handful of men and women daring to think they can design the medical marketplace. They would empower an even smaller group to determine–for millions of diverse Americans–which medical treatments are worthy and at what price.

How do these arrogant, presumptuous politicians believe they can know enough to plan for the rest of us? Who do they think they are? Under cover of helping uninsured people get medical care, they live out their megalomaniacal social-engineering fantasies–putting our physical and economic health at risk in the process.

Will the American people say “Enough!”?

I fear not, based on the comments on my blog. When I argued that medical insurance makes people indifferent to costs, I got comments like: “I guess the 47 million people who don’t have health care should just die, right, John?” “You will always be a shill for corporate America.”

Like the politicians, most people are oblivious to F. A. Hayek’s insight that the critical information needed to run an economy–or even 15 percent of one–doesn’t exist in any one place where it is accessible to central planners. Instead, it is scattered piecemeal among millions of people. All those people put together are far wiser and better informed than Congress could ever be. Only markets–private property, free exchange, and the price system–can put this knowledge at the disposal of entrepreneurs and consumers, ensuring the system will serve the people and not just the political class.

This is no less true for medical care than for food, clothing, and shelter. It is profit-seeking entrepreneurship that gave us birth control pills, robot limbs, Lasik surgery, and so many other good things that make our lives longer and more pain-free.

To the extent the politicians ignore this, they are the enemies of our well-being. The belief that they can take care of us is rank superstition.

Who will save us from these despots? What Adam Smith said about the economic planner applies here, too: The politician who tries to design the medical marketplace would “assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

Related posts:

1. Not with a Bang But a Whimper
2. Competition
3. Competition Would Save Medicine, Too

I take it for granted that I can go to a foreign country, hand a piece of plastic to a total stranger who doesn’t speak English . . . and he’ll rent me a car for a week. Later,Visa or MasterCard will have the accounting correct to the penny.

Compare: Governments can’t even count votes accurately—or deliver the mail efficiently.

Yet now, somehow, government will run auto companies and guarantee us health care better than private firms? And the public seems eager for that!

If you think it’s mainly the political class and mainstream media that are clueless, listen to the doctors. Dr. Atul Gawande, in an otherwise interesting New Yorker article on health-care costs, disparages medical savings accounts and high-deductible insurance. First, he explains the theory behind this proposal to cardiologist Lester Dyke:
“[People would] have more of their own money on the line, and that’d drive them to bargain with you and other surgeons, right?”

Gawande comments, “He gave me a quizzical look.”

The doctors then dismiss the idea with a sneer.

“We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? ‘I’ll do three vessels for $30,000, but if you take four, I’ll throw in an extra night in the ICU’—that sort of thing? Dyke shook his head. ‘Who comes up with this stuff?’ he asked.”

I do. Adam Smith did. Market competition is what’s brought us most of what’s made life better and longer.

The Free-Rider Benefit

But the doctors have mastered the anti-free-market sneer: Markets are good for crass consumer goods like washing machines and computers, but health care is too complicated for people to understand.

That’s nonsense. When you buy a car, must you be an expert on automotive engineering? No. And yet the worst you can buy in America is much better than the best that the Soviet bloc’s central planners could produce. Remember the Trabant? The Yugo? They disappeared along with the Berlin Wall because governments never serve consumers as well as market competitors do.

Maybe 2 percent of customers understand complex products like cars, but they guide the market and the rest of us free-ride on their effort. When government stays out, good companies grow. Bad ones atrophy. Competition and cost-conscious buyers who spend their own money assure that all the popular cars, computers, etc. are pretty good.

The same would go for medicine—if only more of us were spending our own money for health care. We see quality rise and prices fall in the few areas where consumers are in control, like cosmetic and Lasik eye surgery. Doctors constantly make improvements because they must please their customers. They even give out their cell numbers.

Drs. Dyer and Gawande don’t understand markets. Dyer’s elderly woman wouldn’t have to haggle over price before surgery. The decisions would be made by thousands of 60-, 40-, and 20-year-olds, the minority who pay closest attention.

Word about where the best values were would quickly get around. Even in nursing homes, it would soon be common knowledge that hospital X is a ripoff and that Y and Z give better treatment for less.

People assume someone needs to be “in charge” for a medical-care market to work. But no one needs to be in charge. What philosopher F. A. Hayek called “spontaneous order” and Adam Smith called “the invisible hand” would make it happen, just as they make it happen with food and clothing—if only we got over the foolish belief that health care is something that must be paid for by someone else.

Related posts:

1. Medical Competition Works for Patients
2. Competition
3. Why Medicine Is Slowly Dying in America

“A failure to act, and act now, will turn a crisis into a catastrophe,” President Obama said.

If someone expresses skepticism, Obama and other political leaders suggest that economists are unanimous in believing that government spending is the only answer.

“We have a consensus that we need a big stimulus package that will jolt the economy back into shape,” Obama said.

House Majority Leader Steny Hoyer agreed: “Every economist from right to left, Republican, Democrat, advises that it has to be a very substantial package.”

What Consensus?

It’s a lie. There was no consensus. (Anyway, a consensus doesn’t mean something is true.) Finding an economist who opposed government spending as a way to fix the economy was easy. More than 350 signed a petition opposing the bill.

“How is it the government is going to be able to spend a dollar in such a way that it generates a dollar or more in value?” asked George Mason University economist Peter Leeson. “A more likely possibility is that a dollar that government takes out of the private sector is a dollar the private sector doesn’t have to spend.”

Leeson is referring to the “broken-window” fallacy, which comes from Frédéric Bastiat’s story about a boy who throws a rock through a shop window. Since the shopkeeper has to buy a new window, some believe the mischief will actually stimulate the local economy. The fallacy lies in overlooking that the shopkeeper would have spent the money some other way if he didn’t have to replace the window.

Every penny the government spends will first have to be borrowed from someone in the economy—that is, someone already struggling with the recession’s effects on their income, assets, and future planning. So where’s the stimulus?

It’s also quite a conceit to believe that a few men in power are smart enough to know precisely how to spend trillions of your dollars.

“They’re exploiting a minor correction in the economy. . . . Markets go through corrections all the time,” Lydia Ortega of San Jose State University told me.

I pointed out that people say this correction is worse—maybe like the Depression.

“But markets need to go through this correction,” she said. “What’s happening now, what’s making it worse, is that people don’t know what’s going to happen. There’s so much uncertainty generated by the government spending.”

The more the government does, the more private investors wait.

“Part of the reason that people aren’t spending is they don’t know what these characters in Washington are going to do,” says Howard Baetjer of Towson University.

“Japan tried six spending packages in the early 1990s. The result? A decade of lost growth,” points out Ben Powell of Suffolk University. “It’s the government’s own policies that contributed to the bubble. The government’s not the answer to it.”

One Finger in the Dike, Two Crossed

I wanted to ask the bailout’s big boosters about that. Two agreed to talk: Maxine Waters of the House Finance Committee and Majority Leader Hoyer.

Hoyer conceded that he “overstated the case” when he said every economist endorsed government action.

Wasn’t the bubble caused by too much debt?

“No doubt about it.”

So the answer is more debt?

“Most economists believe that’s the case.”

This stimulus spending, is it going to work?

“I hope so.”

Might it cause hyperinflation?

“We hope it doesn’t.”

Well, that’s comforting.

“Government can’t sit and just twiddle its fingers,” Rep. Waters told me. “We have got to interject money into these banks and these systems that help this economy work.”

How are you going to pay for it?

“We have borrowed money before. We continue to borrow money, but we pay it back.”

She left a few things out. Debt means interest payments and higher taxes in the future. It also means inflation when the Fed prints money to reduce the real value of the debt.

But the politicians are confident that they can wisely spend trillions of your dollars. The arrogance of the political class is stunning.

Related posts:

1. Book Review: The Fatal Conceit: The Errors of Socialism by F. A. Hayek
2. The Conceit of the Regulators
3. A Microeconomist’s Protest

But wait. Only 3.5 million jobs? Why so few? It’s not like creating jobs is difficult.

Egypt built more than 100 pyramids beginning sometime in the third millennium B.C. to house the corpses of the pharaohs and their significant others. Think of all the jobs that project created. I’ll bet the unemployment rate was something any pharaoh could have proudly campaigned for reelection on—if he faced election, that is. Pyramid-building is one heck of a public-works project.

Pyramids, Earthquakes, Wars

Its economic significance was not lost on that great advocate of full employment through public works, John Maynard Keynes. The British economist, so in vogue today, famously wrote in The General Theory on Employment, Interest, and Money (1936), “Pyramid-building, earthquakes, even wars may serve to increase wealth.”

In fact, pyramids are even better than the usual government project. Keynes said: “Two pyramids . . . are twice as good as one; but not so two railways from London to York.”

Ancient Egypt’s success has many applications today. We could have full employment overnight if the government simply outlawed machines. Today’s 8 percent unemployment rate would vanish.

Again, we find an endorsement in Keynes’s General Theory: “‘To dig holes in the ground,’ paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services.”

Exhibit B is Franklin Delano Roosevelt. I don’t mean his public-works projects, like the Civilian Conservation Corps. I’m talking about his most serious job-creating operation: the draft.

If You Can’t Employ ‘Em, Draft ‘Em

In September 1940 Roosevelt signed the Selective Service Act, which ordered all males 21–35 to register for military service. “Of the 16 million persons who served in the armed forces at some time during the war, 10 million were conscripted, and many of those who volunteered did so only to avoid the draft. . . .” writes Robert Higgs in Depression, War and Cold War.

The draft marked the beginning of the end to the double-digit unemployment that had plagued America for a decade. Two years earlier, Roosevelt’s treasury secretary, Henry Morgenthau, lamented, “[A]fter eight years of this administration we have just as much unemployment as when we started.” The draft was the answer they had sought all that time.

So creating jobs is not difficult for government. What is difficult for government is creating jobs that produce wealth. Pyramids, holes in the ground and war do not produce wealth. They destroy wealth. They take valuable resources and convert them into something less valuable.

Instead of iPods, great art, cures for diseases and machines that replace back-breaking work, we get the equivalent of digging holes and filling them up.

Under President Obama’s “stimulus” plan, jobs will be created to weatherize buildings, construct schools and wind turbines, and repair roads and bridges. But outside the market process, there is no way to know whether those are better uses of scarce capital than whatever would have been produced had it been left in the private economy.

Since government services are paid for through the compulsion of taxes, they have no market price. But without market prices, we have no way of knowing the importance that free people would place on those services versus other things they want.

So although we’ll see the government putting people to work and even some new schools and bridges, we won’t be able to calculate how much wealth we’ve lost because scarce resources were misallocated by the politicians.

Nevertheless, we can be sure we will have lost. If the government’s projects were truly worthwhile, they would be undertaken by private efforts, and in their quest for profits, entrepreneurs would handle them more efficiently.

Remember this when President Obama begins to boast about how successful his stimulus plan is.

Related posts:

1. Spreading the Work to Create More Jobs
2. Why Government Can’t Create Jobs
3. Why Government Jobs Programs Destroy Jobs

The “Buy American” provision of the stimulus bill, which mandates the use of domestic iron, steel, and manufactured goods even if imports are cheaper, makes our trading partners nervous. That created a problem for President Obama: “I think it would be a mistake . . . at a time when worldwide trade is declining for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade,” he said.

But some members of his party were elected on protectionist platforms, and they are not about to blow this chance to reward their union and industrial constituencies. What was Obama to do?

He did what old-style politicians always do: tried to have it both ways by resorting to vague rhetoric. He said he’d “see what kind of language we can work on this issue.”

The Senate then added a line saying that the “Buy American” section must be “applied in a manner consistent with U.S. obligations under international agreements.”

So is the law protectionist or not? It sounds as though our trade agreements must be respected, but as the New York Times noted, “[I]n many cases it [a “Buy American” provision] is not considered a violation of trade treaties.” Public Citizen’s protectionist website, Eyes on Trade, agrees: Under its trade agreements, the United States has “always been allowed to do most if not all of what is in the stimulus package.”

As long as it remains in the bill, the “Buy American” section will haunt us. Protectionism is poison. Prosperity means having access to the least expensive goods the world has to offer. When we save money buying something cheaper from abroad, we have more money to spend on other things or to invest. Laws that force us to pay more for things cannot make us wealthier.

More Beggers and Hostile Neighbors

Protectionist unions and firms say that a “Buy American” policy creates jobs at home. But that is misleading, because while protectionism does save some American jobs—often temporarily—the policy also destroys jobs at home.

It destroys jobs in two ways. First, when foreigners lose sales here, they have fewer dollars with which to buy American exports or to invest in the U.S. economy. Jobs in the export sector disappear, and the jobs that would have been created through the new investment won’t be created.

Second, when foreign nations retaliate against American exporters, even more jobs are destroyed.

“Buy American” is a dishonest slogan because it leads to a loss of American opportunities for prosperity. It is special-interest legislation that is paid for dearly by other Americans. As my first college economics professor, Burton G. Malkiel, wrote in the Wall Street Journal, “Beggar-thy-neighbor policies create more beggars and hostile neighbors.”

The alleged “stimulus” bill is a rotten idea to begin with. Government has no resources that it hasn’t first taken from someone else. By borrowing nearly $800 billion to pay for pet political projects, government prevents that money from being used to rebuild the economy according to consumer preferences. Bad stimulus drives out good.

Protectionism makes it even worse, and we should know better. In 1929-30, President Herbert Hoover and the U.S. Congress helped turn a depression into the Great Depression by enacting the infamous Smoot-Hawley tariff. Hoover’s mere announcement that he would sign the bill pushed the stock market into the tank. Hoover and Congress then made their bad tariff decision worse by approving a “Buy America Act,” which required federal projects to use only American supplies. Hoover signed it on his last day in office. Countries the world over retaliated, and by 1932, U.S. exports had fallen 64 percent, aggravating unemployment, which approached 25 percent.

The effects of the “Buy American” provision of the “stimulus” bill may not be as egregious, but who knows?

What we do know is that many of our so-called leaders have learned nothing from history.

Related posts:

1. Episode 13: Pelosi Health Care Bill
2. Economic Notions ~ The Cure Can Be Worse than the Disease
3. Making Environmental Tradeoffs

Perpetrators of Ponzi schemes lead clients to believe their money is invested and that their profits are the fruits of the money manager’s savvy. But in fact the “profits” are merely revenue provided by the next group of dupes. Eventually, when no more new dupes can be found, the scheme crashes.

Political leaders say Madoff’s alleged crimes show what’s wrong with the country. President Obama said the “massive fraud . . . was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball.” Senate Majority Leader Harry Reid added, “[R]egulators have been asleep at the wheel.”

Politicians go on and on about Wall Street “greed” and “irresponsibility.”

But Madoff’s scam was small compared to Ponzi schemes the government itself runs: Social Security and Medicare.

By now we all know the government does not invest our payroll taxes and pay our benefits with the profits our money earns. In the beginning, writes economic historian Charlotte Twight in Dependent on D.C., Americans were told Social Security was an insurance program. But the government was unable to sustain that bald lie.

No-Trust Fund

In reality our money, rather than being invested and kept in an actual “trust fund,” is immediately given to current retirees in Social Security benefits or to their healthcare providers in Medicare benefits. The government’s promise to pay for your retirement pension and medical care is just a promise. And a lie.

In theory, the promise could be kept by raising taxes on future workers, but there won’t be enough of them. Changing demographics are destroying the programs. A large working class can support a relatively small retired class, especially when life expectancy is 61 years and benefits don’t begin until 65. That’s how things were in the early years of Social Security. But when life expectancy grows to 80 and a large generational group—the baby boomers—retires expecting to be supported by a far smaller working class, that’s trouble.

Ten years after Social Security passed in 1935, there were almost 42 workers for each retiree. Five years later, the ratio slipped to about 17 to 1. Now it’s about 3.4 to 1. Thirty years from now, the ratio is projected to be 2 to 1.

Think of the burden on those two to three workers who’ll have to support one retiree for 15 to 20 years.

The money just won’t be there. In the next 75 years Social Security and Medicare have a combined unfunded liability of $40.3 trillion. Social Security’s problems get most of the attention, but Medicare will be the killer. At present it accounts for all but $4.3 trillion of the unfunded liability, and as we aging boomers keep demanding new, improved, and more expensive medical care, the deficit will only get worse

Soon government will have to say what Madoff said: Sorry! The money’s gone.

The government has no legal obligation to make good on its promises. Twice the U.S. Supreme Court ruled that Americans have no contractual rights regarding Social Security benefits. In 1960 (Flemming v. Nestor), the court said, “To engraft upon the Social Security system a concept of accrued property rights would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.”

Get that? You have no “accrued property rights” under Social Security. It’s a welfare program that exists at the politicians’ pleasure.

Either the government will stiff us outright or, more likely, cowardly politicians will pretend to honor their promises by printing so much extra money to write the checks that the dollar will be worth pennies.

If Bernie Madoff tried to foist Social Security and Medicare on us, he’d be arrested, prosecuted, and thrown in the hoosegow.

There’s one thing I can say on behalf of Madoff: He never forced anyone to participate in his scheme. That’s more than I can say for the government. Through taxation and inflation, it forces us to pay for all its schemes.

Related posts:

1. Ponzi Was a Piker
2. Regulation Will Stop Future Madoffs? It Just Ain’t So!
3. Making Social Security More Harmful

That’s a good analogy for the inflationary policies now pursued by Washington. These policies may temporarily “stimulate the economy,” but they also disguise and aggravate the underlying problems. We will all pay a serious price.

Policy makers have thrown caution to the wind. Twelve-digit dollar figures are tossed about casually. Late last year, after then-Treasury Secretary Henry Paulson changed course—yet again—and announced that the Federal Reserve would commit $800 billion more in “new loans and debt purchases,” the New York Times reported, “Fed and Treasury officials made it clear that the sky was the limit.”

The total federal commitment as of that date was over $7 trillion.

The Fed had given up trying to make it easier for banks to lend to each other. Now, the Times reported, it “is directly subsidizing lower mortgage rates . . . doing so by printing unprecedented amounts of money, which would eventually create inflationary pressures if it were to continue unabated.”

No kidding.

When we hear that the U.S. Treasury is doing this or the Federal Reserve is doing that, we should remember that these agencies are run by mere mortals, and as such, they cannot know how to “fix” something as complex as an economy. But they certainly are capable of wrecking one.

That’s what their inflationary policies will do.

In a free market, prices do more than tell us what we have to pay for things. They are messages emitted by an intricate communications system that inform us of the relative scarcity of resources, labor and consumer goods, and the relative intensity of consumer demand. Thanks to prices, we can tell producers how we rank our preferences, and they in turn can arrange production according to our priorities. Without prices, economic coordination is impossible, which is why attempts at state planning produce, in Ludwig von Mises’ words, “planned chaos.”

We associate inflation with a rising price level, but equally important, relative prices change when new money is created. That garbles the messages. As Mises writes, “The additional quantity of money does not find its way at first into the pockets of all individuals; . . . [P]rice changes which are the result of inflation start with some commodities and services only. . . . [T]here is a shift of wealth and income between different social groups.”

The Fed gives money to AIG or Citicorp, but not to Lehman Brothers, or you and me. The new bank reserves also push interest rates below what the market would have set, further distorting production by encouraging investment plans to be made on the basis of artificially low rates.

How can the economy straighten itself out if it is being systematically skewed by government interference with prices?

We are in the mess we’re in precisely because of earlier government interference. Easy mortgage terms and guarantees contrived a housing boom and irresponsible lending that could not be sustained. The consequences have shaken the foundation of the financial industry. But instead of freeing the market and allowing the errors to be corrected, the government is seducing the economy into a whole new set of errors. That will lead to the next bust.

“But doesn’t the government have to act?” people ask. “We can’t just let financial companies fail!”

I say, “Why not?”

Jim Rogers, the successful investor and author, puts it well: “Why are we bailing out Citibank? Why are 300 million Americans having to pay for Citibank’s mistakes? The way the system is supposed to work [is this]: People fail. And then the competent people take over the assets from the failed people, and then you start again with a new, stronger base. What we’re doing this time is . . . taking the assets from the competent people, giving them to the incompetent people, and saying, ‘OK, now you can compete with the competent people.’ So everybody’s weakened: The whole nation is weakened, the whole economy is weakened. That’s not the way it’s supposed to work.”

Related posts:

1. Government Sets a Pattern
2. The Fed Sets Interest Rates? ~ It Just Aint So!
3. The Fed Should Inflate to End the Financial Crisis? It Just Ain’t So!

What? Does that mean that until last fall the Bush administration embraced the free market? Nonsense. Governments at all levels have regulated and subsidized the housing and financial industries for years. Nothing changed under President Bush.

The government-backed Fannie Mae and Freddie Mac were created precisely to interfere with the housing and mortgage markets. In effect, Freddie and Fannie diverted money to people who wouldn’t have qualified for mortgages in a real private market.

Had actual private companies performed these activities, they would have been subject to market checks. But they were not. The results were predictable.

Now that it’s all tumbling down, the politicians and pundits blame the free market.

It’s not simply misunderstanding. It’s demagoguery by people who will never admit that their “progressive” social policies have spawned a taxpayer bill that boggles the mind.

This is a story not of private enterprise but of cynical political opportunism. Moral hazard—the poisonous mix of private profits and taxpayer-covered losses—is what you get when politicians indulge their hubris to redesign society. The bailout of those companies holding bad mortgages—big-business socialism—sets us up for the next crisis.

Could we count on the Republican presidential candidate to dissent? Not a chance.

John McCain said, “We are going to fight the greed and irresponsibility on Wall Street. These actions [leading to crisis] stem from failed regulation, reckless management and a casino culture on Wall Street. . . . We need strong and effective regulation. . . .”

He proposed a new bureaucracy, the Mortgage and Financial Institutions Trust (MFI), which he said would “provide troubled institutions with an orderly process to identify bad loans, provide funding and eventually sell them at a profit. . . . The MFI will supervise the sale of loan assets at market prices and purchase them as necessary” (emphasis added).

A government agency is going to buy bad loans and make a profit selling them. Give me a break!

Perverse Incentives

Irresponsibility induced by government-created perverse incentives is the culprit. For decades politicians of both parties have relieved big companies of the responsibility that market discipline would have imposed. The promise—explicit or implicit—to bail out companies “too big to fail” weakens market discipline. That invites recklessness.

What if the government cut Freddie, Fannie, Bear, AIG, and the others loose and let them do what other businesses do in hard times: renegotiate with creditors and revalue assets? Would there have been another Great Depression? Not likely. What turned a recession into the Great Depression was the Federal Reserve’s contraction of the money supply. I doubt they’d make that mistake twice.

Public officials say the big companies must be saved to prevent a devastating credit “lock.” Really? Without a federal bailout, lending wouldn’t have resumed? The market wouldn’t have sorted it out? Prices wouldn’t have found a more solid floor? We’ll never know.

We do know that the taxpayer will buy—probably for too much money, because the private sellers will fool the government managers—at least $700 billion in “illiquid” assets. Where will this money come from: taxation, borrowing or the printing press? What will that do to our economic well-being?

Crisis is the friend of the State. The politicians are desperate to be seen as “showing leadership,” so we’re surely in for a new round of government interventions. Watch for the equivalent of the Sarbanes-Oxley Act. There’ll be much posturing about how the new regulations “will keep this from ever happening again,” but that’s more nonsense because the root problem is not lack of regulation. It’s government social engineering of the housing market, which will be unchanged.

This is the path to stagnation and poverty. As Nobel Laureate F. A. Hayek taught, markets are too complicated for planners to know enough to plan them. The relevant information, scattered unspoken among billions of market participants, is beyond the bureaucrats’ reach.

We do need protection from reckless businessmen. But there is only one way to provide that: market discipline. That means no privileges and no bailouts.

Related posts:

1. Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse
2. Nationalization of the Mortgage Market
3. Can the Feds Save the Housing Market?