Guest post from my former student Jim Vinoski:
Free Our Markets explains how investment can quickly turn to waste when it’s shielded from market incentives and market feedback. With government spending in particular, this non-market “investment” often results in continued allocation of capital that could be used for much better purposes toward less valuable ends. Oftentimes the main driver is the GDP measure, which politicians believe indicates growth, but which in fact simply adds up all spending, productive or not. Below are two examples that arise when that economic blunder is made on a colossal scale by bureaucrats with far too much power.
Real estate in China provides a frightening example, as shown in the videos here. Autocrats in China, bent on proving that their “softer” Communism of today can rival the West’s success, have built entire cities that became instant ghost towns, quickly decaying from lack of use and maintenance. It’s bad enough that the first of these icons of hubris were built at all, starving productive projects of capital. But as we see in the newer video, the building continues, and that softer Communism becomes less soft when the authorities decide their path to success is to force the relocation of farmers and suburbanites to these nightmarish monuments to “progress.”
But that can’t happen here, you say. Perhaps not in that form. But as this article spells out, here on our side of the world the Federal Reserve is engaged in open-ended printing of $85 billion in new money every single month, to support “growth.” As I see it, this is a result of something similar to the regulatory capture notion spelled out in Free Our Markets – in this case, institutional investors and large corporations have such sway with bureaucratic policy-makers that their desire for low interest rates through “easy money” tramples responsible fiscal management. Politicians laud this action as “stimulus” and point to its effect on GDP as evidence of growth. But again, spending is not necessarily growth. And as with the victims of China’s policies, real people here are suffering as a result. For years now, fixed-income elderly have earned essentially no interest on their hard-earned savings. And I believe that the net of suffering will soon be cast wider—I believe that “something that can’t last forever, won’t.” There’s a serious risk that the huge glut of fiat money being created will result in runaway inflation, in which case my own 401k will be of much less value in the future, impacting my own plans for retirement. On the other hand, the experience in Japan, where similar monetary mismanagement has been the norm in recent decades, has been that the economy just sputters and sputters, with the lack of real growth meaning that recovery simply never happens. The routine talk of the “lost decade” there would more properly now be about a “lost quarter-century” or more, and counting.
Without profit-and-loss feedback, policy-makers and regulators have weak incentives to correct their ways. And unlike businesses, they can never go bankrupt. Unless we citizens learn the error of our politicians’ ways and hold them accountable, responsible Americans who have lived within their means and saved for the future may be cheated of what they have earned. How different would we be, then, from the poor Chinese man in the video who pretends he’s happy to have his comfortable home demolished? It’s far past time that we Free Our Markets.