Restoring Economic Freedom

Economies in the western world have essentially flat-lined over the last couple of years, with high unemployment rates and anaemic GDP growth. Currently there is strong polarisation between two schools of thought as to how to fix our economies:

  • Big government intervention and social programs (“state socialism”)
  • Government maintaining faith in the private economy and entrepreneurship

Below is a great video that discusses the fork in the road through the correlation of “economic freedom” with “quality of life”.

This post continues my series of initial intros. Down the road, time permitting, I plan for “free market conservatism” to be one of the in-depth topics covered in my blogs. Despite my best intentions to hold back further thoughts for now, I have a little further discussion regarding the two “avenues” mentioned above, which can be read by clicking on the “continue reading” tag.

Enjoy, CSM

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(As a disclaimer, the below should be considered as brief notes rather than in-depth analysis. Time permitting, “free market conservatism” will be one of my topics of focus as this site evolves with time.)

As I mentioned in the introduction above, there is currently polarisation amongst our folks as to two avenues to solve our economic malaise.

  • Big government intervention and social programs (“state socialism”)
  • Government maintaining faith in the private economy and entrepreneurship

                                                                                               

(1) Big government intervention and social programs (“state socialism”)

Let us remember that recessions are an unavoidable reality that occur as part of the natural economic cycle. As a general rule of thumb, the deeper the recession, the sharper the ensuing recovery. There are two major exceptions to this rule, namely the current anaemic recovery under Obama, as well as the prolonged depression during the whole of the 1930’s under FDR. Both FDR and Obama went down the road of big government policies and social reforms, which resulted in uncertainty in the regulatory environment, and a stifling of the private sector.

Let us look at the history of post World War II recessions and “recoveries” [1].

Regarding FDR’s new deal, there is a lot of revisionist history that papers over the fact that despite massive government spending, no technical recovery actually resulted throughout the whole of the 1930’s. One of the best modern day writers who has covered this in depth is Amity Shlaes [2] [3].

With respect to Obama’s economic stimulus package, it is important to note that big government spending results in a stifling of investment in the private sector. This has been demonstrated within a recent study written by James Sherk [4]:

“The resources the government spends do not materialize out of thin air — they are taken from the private sector. Each dollar the government borrows is one less dollar that entrepreneurs can borrow to fund new operations or that private consumers can spend. Research shows that government spending crowds out private investment. Each $1 increase in government spending reduces private-sector investment by between $0.46 and $0.97 after two years, and $0.74 and $0.95 over five years. Government spending substitutes for private-sector investment; it does not supplement it. Increased government spending will further reduce private-sector investment, making the problem of low job creation worse… Government spending eliminates more jobs than it creates.” 

It also goes without saying that periods of big government result in sharp increases in the debt to GDP ratio, creating an environment of economic uncertainty that stifles private investment and liquidity.

                                                                                

(2) Government maintaining faith in the private sector and entrepreneurship

There is no better way to demonstrate the strength of this avenue then to acknowledge that the U.S. and U.K. have been extraordinarily successful nations and a major reason for this success is due to the greatest combined output of ground-breaking technological inventions in the history of planet Earth. Whether it be civil engineering (e.g. Isambard Kingdom Brunel), the light bulb (Thomas Edison), automobile mass production (Henry Ford), the boom in household appliances (from the 1920’s onwards), aviation, blockbuster medicines, the personal computer revolution, as well as the internet and telecommunications. In each case, the by-product is millions of jobs created and billions of dollars in tax revenues. What will be the next technological revolutions? One can only guess and let the imagination run wild. Currently there is a shale gas exploration boom across the U.S. [5]. Down the road, there is likely to be a boom in private space industry and tourism.

Throughout history, there are examples of government interference in trying to artificially pick winners and losers through the use of subsidies funded through the taxpayer. Such subsidies have often proven to be wasteful and counter-productive, e.g. ethanol subsidies [6] and “green jobs” programs (subsidies for loss-making solar and wind technologies) [7].

Many people have the opinion that government investment is required to stimulate technological breakthroughs. At the same time, many of these individuals often have little/no knowledge of venture capitalism (and how big government stifles liquidity).

Many on the left will nowadays point towards China as an example of “state socialism”. Firstly, let us remember that communist/socialist states have always failed in the past, e.g. the fall of the iron curtain in the late 1980’s. Additionally, China does have a level of economic freedom afforded as a result of an acknowledgement that “greed is good”.

However, the Chinese economy is highly dependent on cheap labour, which is unsustainable with dramatic increases in the cost of living (inflationary pressures). Because of a largely undemocratic and unaccountable government, large investments can be guided by corruption rather than principled common sense. Due to a lack of transparency, the economic books can be cooked to mask the reality. In all likelihood, a looming debt crisis is likely to manifest as an acute crisis, that will likely overshadow that of the U.S., the E.U., and Japan [8]

In summary, despite whatever imperfections, the economic governance model that has been proven to be successful involves a democratic and accountable government which fosters economic freedom and liberty.

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References:

[1] http://abriefhistory.org/?p=3106

[2] http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013002760.html

[3] The Forgotten Man: A New History of the Great Depression, Amity Shlaes (2008)

[4] http://thf_media.s3.amazonaws.com/2010/pdf/bg_2392.pdf

[5] http://canadafreepress.com/index.php/article/37966

[6] http://www.forbes.com/2010/12/08/ethanol-subsidies-energy-opinions-contributors-matt-kibbe.html

[7] http://www.qando.net/?p=8481

[8] http://www.crikey.com.au/2011/06/30/maley-chinas-looming-debt-threat/

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4 thoughts on “Restoring Economic Freedom

  1. G’day CSM,

    Interesting thoughts. You might also want to factor in the importance of personal as well as economic freedoms in ensuring quality of life; I have dealt with these in Part 1 and Part 2 of my series on Libertarianism.

    Your graph comparing unemployment during post-WWII recessions is particularly interesting. It clearly demonstrates the 2008 GFC was indeed the most severe economic downturn since the Great Depression. If August 2 this year rolls around without your Congress passing a resolution to raise your debt ceiling, the United States defaults on its debt obligations, and your Glorious Leader turns to the Fed’s printing presses to extricate your country from the hole into which it has dug itself, what then?

    • G’Day Ozboy. Nice reads on libertarianism, inc. the Nolan chart as well as clearing up the difference between libertarianism and anarchy. I personally have a vision for two to three steps away from anarchy (i.e. minimal, but effective and lawful governance). However, I am not quite a pure libertarian yet due to the need to reserve a little pragmatism, e.g. drugs, “ground zero” mosque.

      The best solution for me in the U.S. is to devolve as much decision-making to the 50 states, allowing local autonomy and experimentation, with folks allowed to vote with their feet (difficult with the current poor housing market, I know).

      I’m currently on the drawing board, planning a few more topics, possibly “we the people” and “common sense solutions”. Regarding “we the people”, I note some constitutional differences between the U.S. (inc. mid-term elections), compared with the U.K., E.U., and other countries (inc. Oz).

      Re. the debt limit, things are not looking good with Obama hell-bent on including tax increases in any deal. He seems to be pushing for the removal of loopholes and deductions whilst keeping tax rates the same (instead of reducing them accordingly).

      • G’day CSM,

        Yes it’s an important distinction, between Libertarianism and conservatism. My own readership is split between people who identify as one or the other (plus Izen, who is neither, but whom we’re trying to rehabilitate 😉 ). I’m careful these days to make the distinction clear; my failure to do so last year lead to a great deal of anguish, as you may be aware. But there is plenty of common ground between us, and the AGW issue is a typical example of that.

        We’re certainly on the same page when it comes to the decentralization of power; totalitarianism seeks always to concentrate power in state central committees. As both your current government and mine are constantly doing. In terms of the “grey areas” of how far the state should intrude on the lives of the citizenry, that is a fertile area for discussion and I look forward to your articles to come. I do know that people in your country of all political persuasions tend to claim your Founding Fathers, the great champions of Liberty, as their own. They can’t all be correct.

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