Straw man capitalism and a new path to prosperity.

• Author: Moore, Stephen

Soon after the $700 billion Troubled Asset Relief Program (TARP) became law in October of 2008, the Washington Post ran a widely acclaimed article entitled "The End Of American Capitalism?" (1) The article called into question the supremacy of capitalism and the durability of free markets in the wake of the financial crisis. The same theme appeared in countless articles in the months that followed. By April 2009, a poll found that only fifty-three percent of American adults believed capitalism to be better than socialism. (2) This lack of confidence in capitalism provided the setting in which President Obama pledged "to act boldly, to turn adversity into opportunity, and use this crisis as a chance to transform our economy for the 21st century." (3) Public expenditures have gone toward bailouts of failing firms, economic stimulus plans, Cash for Clunkers, and other proactive government policies aimed at pulling the U.S. economy out of recession. President Obama's pledged transformation has been a multi-trillion dollar failure and offers new evidence of the bankruptcy of countercyclical government interventionism as a means of economic recovery. If the short-term effects of these programs have been disappointing, the long-term effects of the nearly three trillion dollars in additional debt will be even more debilitating.

1. THE TRANSLUCENT HAND

   An elementary truth must be noted before any discussion of the financial crisis and its aftermath can take place: the economic system of the United States prior to the downturn did not represent free-market capitalism. This point is not novel. Economics textbooks, almost unanimously, describe the system as a "mixed economy" in which nearly every private sector is subjected to some degree of government regulation, and the 2008 Federal Register contains almost eighty-thousand pages. (4) It is an error to consider "capitalism" and the American economic system to be roughly synonymous. This important distinction has been drowned out by the dissonant grumblings of unjustified acrimony towards markets. Free-market capitalism has become a straw man on which leftists blames every economic ill in an attempt to usher in policies that further increase the role of government in the marketplace.

   Since the New Deal, fiscal conservatives have been on defense, not on offense. In 2009, there was no free market to defend. In the 1930s, government entities produced, on average, roughly fifteen percent of GDP. (5) From 1970 through 2008, government on average accounted for about twenty-five percent of GDP (the effects of spending increases in 2009 will be considered subsequently). (6) These figures do not even account for the unseen costs associated with the burden of government--the costs of complying with regulations--which were about another eight percent of GDP in 2008. (7)

   The supply-side revolution associated with President Ronald Reagan--the most hopeful attempt at securing prosperity through limited government in twentieth-century American politics--was about tearing down big-government policies by, for example, lowering tax rates and lessening regulatory burdens. It was not a defense of a free-market status quo. Although the revolution made some progress, it by no means created the Randian state assumed by its detractors. (8)

2. CRY ME A CRISIS

   The contemporary leftists have taken to using the term "free-market fundamentalism" to pejoratively characterize the economic philosophy of President George W. Bush's Administration and to blaming "deregulation" for the financial crisis. (9) President Bush, however--even before the trillions of dollars in bailouts and guarantees during his last year in office--was far from a fiscal conservative. Veronique de Rugy, an expert on fiscal policy at George Mason University's Mercatus Center, has done research that shows President Bush to have been the biggest regulator since Richard Nixon and that the Bush team "spent more taxpayer money on issuing and enforcing regulations than any previous administration in U.S. history." (10)

   President Obama seems to have overlooked this nontrivial fact. In a Democratic primary debate, Mr. Obama shared his thoughts on the government's role in the financial crisis:

   [T]he sub-prime lending mess, part of the reason it happened was because we had an administration that does not believe in any kind of oversight.... You've got to disclose if you've got a teaser rate and suddenly their mortgage payments are going to jack up and they can't pay for them. And one of the things that I intend to do as president of the United States is restore a sense of accountability and regulatory oversight over the financial markets. (11) This reading of history is dead wrong. Worse yet, President Obama now works closely with many who were complicit in, or directly responsible for, the well-intentioned but pernicious policies that led to the subprime lending debacle that triggered the most severe recession in a generation.

   When it came to increasing home ownership, Congress abdicated its due diligence role in part because of the awesome lobbying power of the housing industry, which provided massive campaign contributions to members of Congress in both parties in return for ever-generous housing subsidies and a blind eye to the massive debt and risks of Fannie Mae and Freddie Mac. In a House Financial Services Committee hearing in 2003, Representative Barney Frank made a declaration indicative of Congress's attitude toward the Government...