At MoneyNews: The Free Market Is the Best Cure for Sick Global Economy

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As the prognosis for the health of the global economy grows dire, nations are undertaking acute government intervention as the key to robust economic health. Instead, the best medicine for economic malaise is a healthy dose of the free market.

Free market failure?
 The widely accepted diagnosis is that the financial crisis and resulting Great Recession was caused by a failure of the free market. The course of treatment prescribed was greater government intervention: increase government spending, raise taxes, publish more regulations and print more money.

For example, the United States increased government spending and raised taxes to new records, promulgated a plethora of regulations and the Federal Reserve went “all in” with an accommodative monetary policy that pumped a massive $4.5 trillion into the economy. The U.S. economy has since improved from critical to stable condition. Now other countries, whose economies are still in the intensive care unit, want the same “miracle cure” treatment plan.

But given the enormous dose of government intervention, the recovery in the U.S. economy has fallen short of expectations. The patient might be out of intensive care but is not even as healthy as prior to the economic emergency. Compare the 2014 with the 2006 labor market. Unemployment is 6.2 percent versus 4.7 percent. Workforce participation is 62.8 percent versus 66.2 percent. Current job growth has been in part-time work and low-wage professions versus full-time work and high-wage professions. Wages have been relatively flat.

This modest recovery is a major reason why the Federal Reserve ended its quantitative easing programs: the costs were far outweighing the benefits. The obvious conclusion is that there are limits to what government intervention, even on a huge scale, can do for economic growth.

Or government failure?
 But what if the diagnosis was wrong? What if government intervention caused the severe economic affliction? Then more government intervention would be the wrong medicine. And a bigger dose of the wrong medicine would make the problem worse.

Accounting for the patient’s history and examination of the symptoms, the alternate diagnosis establishes that the cause was the federal government promoting policies to expand home ownership among low-income buyers. Easing government regulations and lowering lending standards created an opportunity that greedy bankers and individuals took advantage of. But the opportunity was created by government intervention distorting the market in the first place.

Instead, the free market is the cure. The free market treatment plan focuses on getting the government out of driving the economy and putting people back in charge of growth.

There are four ways to do that: shrink government spending, lower taxes, cut regulations and normalize monetary policy.

Shrink government spending. Government simply spends too much money. And it does so poorly because it is a horrible allocator of resources. For example, tax revenues for fiscal 2014 were a historic high of more than $3 trillion. Yet the federal government still managed to increase spending by $500 billion more than it took in.

While much of that is driven by mandatory entitlement spending like Social Security, Medicare and Medicaid, surely there can be a national consensus on eliminating waste, fraud and government snafus.

For example, precious taxpayer dollars were wasted on making a $10 million video game about a young teen escaping a town of fat people. Fraudulent claims bilk the Medicare and Medicaid out of $100 billion per year. And government snafus cost hundreds of billions of dollars a year, like making $2.4 billion in improper payments of food stamps or $7.4 billion in improper unemployment benefits.

Even when the federal government spends money to stimulate the economy, it does so poorly. The Obama Recovery Act of 2009 included $783,000 for a study on why young people consume malt liquor and marijuana. Most egregious were stimulus dollars to jump start the clean energy industry like the $500 million to the bankrupt Solyndra and another $500 million helping Fisker Automotive to build cars and create jobs in Finland instead of the U.S.

It does not cost money to shrink government spending. Instead, shrinking government saves money.

Lower taxes. If government spends less, it will eventually need less revenue. If it needs less revenue, it can either use the surplus to pay down the national debt or lower taxes.

Tax inversions by U.S. corporations have been in the spotlight, but there has been little exposure of the 39.1 percent combined federal and state tax rate in the U.S. That is the highest corporate federal income tax in the industrialized world. It beats confiscatory nations like France (34.4 percent), Italy (27.5 percent) and the United Kingdom (23 percent). Corporations are just doing what is best for their shareholders by seeking lower taxes elsewhere. But they could be repatriating their foreign income if U.S. tax rates were less than the countries they operate in.

Individuals are also subject to confiscatory tax rates. In the top tax brackets, an individual can pay 55.9 percent of their income in federal (39.6 percent), state (13.3 percent) and local (3 percent) taxes. And if you are self-employed like I am, you can add 15.3 percent in payroll taxes (12.4 percent for Social Security, 2.9 percent in Medicare, 2 percent for state and 2 percent for local). Up to 71 percent of an individual’s income is going to pay taxes. Working hard but having trouble making ends meet and little disposable income? There is a reason: unfair taxes. And the tax impact on the economy is akin to putting concrete shoes on an Olympic runner.

Now imagine a personal income tax cut of 33 percent. That would mean $1 trillion that hard-working Americans could keep of their own money. Debts would be paid off, funds for college would increase, new appliances could be bought and retirement savings would go up. There is no doubt in my mind that would have a bigger positive impact on U.S. economic growth than the nearly $1 trillion of stimulus spending the Obama administration spent.

Cut regulations. The federal government’s micromanagement of people and the economy is strangling the economy. The sheer number of regulations makes it difficult for all but the biggest businesses to comply, sticks expensive unfunded mandates like Obamacare on individuals and businesses, discourages competition and increases government spending to pay for more regulators.

During the Thanksgiving holiday, the Obama administration released 3,145 new regulations. In fact, the number of regulations issued in the first five years of the Obama administration was 153 percent higher than in the Bush administration and its getting worse.

For example, the FDA finalized new regulations on menu and vending machine calorie labeling. It will end up costing the restaurant and vending machine industry hundreds of millions of dollars to comply. Those costs will either be absorbed by the industry (further reducing their already razor-thin profit margins and jeopardize businesses and jobs) or be passed on to the consumer. Either way, it will hurt economic growth. It might be a good idea to calorie label, but is government intervention the best way to do it? I contend that the market will calorie label voluntarily when it becomes a profit enhancer to entice health-conscious consumers to their restaurants and products.

Cutting regulations does not cost money. Instead, it boosts the economy, increases compliance and curbs crony capitalism.

Normalize monetary policy. It will be tough to wean the U.S. economy of fiat currency stimulus policies. Wall Street is addicted to the cheap money and the federal government revels in the freedom to print money AND have no accountability for doing so.

The Fed has already stopped the quantitative easing programs and is waiting for the most opportune time to raise interest rates. It still has to unwind $4.5 trillion in excess liquidity. It has not figured out how to do that, let alone address the sizable impact on the economy. Eventually, the bonds and mortgage-backed securities the Fed purchased need to be sold back to financial institutions and the proceeds used to cancel out the money printed to buy them in the first place. This could take decades.

Future problems could be avoided by having sound money policies. One option is to return to an exchange relationship to gold. Gold has intrinsic value determined by market forces. The other option is taking the ability to print money away from the federal government and leaving it to the free market. That is most effectively accomplished by cryptocurrencies like bitcoin.

Promoting a sound currency would accelerate normalizing monetary policy. That would boost the economy by separating money from politics and its manipulation by the federal government.

Conclusion. Overdosing on the wrong drug might improve the feeling of wellness temporarily. But eventually, the boost in well-being fades like a mirage and the patient is left with awful side effects. Huge doses of government intervention have been tried and the mediocre improvement has fallen short of full economic health. It is economic malpractice to increase the dosage, which will worsen the epidemic so that even healthy nations will eventually succumb to the contagion.

If nations, including the United States, are not satisfied with modest economic growth being the new normal, then the prescription needs to change. Given that the cause of the economic malaise was government intervention, the cure is a healthy dose of the free market.

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