Economic follies

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Fix your memory on the early morning hours of Sunday, June 20, 1948, in devastated Germany. The economic czars of the Allied Control Commission in Germany representing the United States, Great Britain, France and the Soviet Union were slumbering after their exhausting labors strictly regulating every nook and cranny of the economy.

A professional economist, Ludwig Erhard, exploited their temporary inattention by introducing the deutsche mark and abolishing virtually all controls on wages and prices. The German economic miracle was born, and Erhard became a political sensation.

But politicians generally, like the French Bourbons, tend to forget nothing and learn nothing. They believe they can outfox the laws of supply and demand and improve on Adam Smith's "invisible hand" in allocating economic resources. Thus, during the last seven months, President Bush, Congress and the Federal Reserve Board have maneuvered to blunt a painful but economically efficient contraction in the housing market and elsewhere by slashing interest rates, injecting cash into the banking system and enacting a fiscal stimulus package, including tax cuts for businesses and cash payouts to individuals. Sen. Hillary Clinton is clamoring for a moratorium on mortgage foreclosures. Other members of Congress would raise the risk of home mortgage loans by exposing them to revision in bankruptcy proceedings.

The current political saber-rattling and gnashing at the ordinary operation of free markets has predictably worsened the economy. Banks are reluctant to lend because they are worried that new laws will obstruct repayments. They demand higher interest rates and larger down payments. Political cures for economic ills invariably are worse than the disease.

The axiom has been known and vindicated for centuries. In 1776, economist and moral philosopher, Adam Smith, admonished in "The Wealth of Nations": "The statesman who should attempt to direct private people in what manner they ought to employ their capital, would not only load himself with a most unnecessary attention, but assume an authority which could safely be entrusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it." Smith recognized the happy convergence of private greed and public good in competitive markets. Farmers, businessmen and professionals alike would be spurred by competition to innovate and minimize prices to capture consumer patronage.

The Founding Fathers echoed Smith in deploring legislative interference with private endeavors or transactions. In Federalist No. 10, James Madison urged a strong central government because the states had proven vulnerable to movements motivated by "a rage for paper money, for abolition of debts, for an equal distribution of property" and for other "improper or wicked project." In Federalist No. 44, Madison elaborated: "The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more industrious and less informed part of the community."

And in Federalist No. 62, Madison underscored the economic harm inflicted by a legislative Sword of Damocles above every private initiative or innovation: "What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government?"

Politicians who understand the economic havoc they will reap regularly capitulate to political anxieties. During his first term, President Richard M. Nixon initially declaimed against wage and price controls: "Now here's what I will not do, I will not take this nation down the road of wage and price controls, however politically expedient it may seem. The pros of rationing may seem like an easy way out, but they are really an easy way out for more trouble. Like the explosion that follows when you try to clamp a lid on a rising head of steam without turning down the fire under the pot, wage and price controls only postpone the day of reckoning."

But Nixon soon renounced his declamation in August 1971 as a presidential election year approached: "The time has come for decisive action. Action that will break the vicious circle of spiraling prices and costs. I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days."

Economic lunacy, however, may simultaneously be political genius. President Franklin D. Roosevelt awakened popular enthusiasm for New Deal nostrums that deepened and prolonged the Great Depression. Direct financial benefits conferred by bumptious legislation are typically concentrated on a comparatively small number of voters. They will feel beholden to their legislative benefactor, for example, homeowners in foreclosure temporarily rescued by a legislatively ordained moratorium. On the other hand, the vastly greater aggregate economic losses occasioned by that same legislation is shared by all voters, who will be disinclined to become furious over a tolerable financial pinch — for example, a tiny climb in interest rates necessitated by a legislatively created business burden or risk. Other losses consisting of forgone transactions elude tracing a connection between the legislative folly and a disappointed voter — for example, loans not made or houses not built or jobs not created.

Only a political maturity that the United States has failed to achieve can resist the temptation to government foolishness when the economy turns south.

Bruce Fein is a constitutional lawyer with Bruce Fein & Associates and chairman of the American Freedom Agenda.