The Free Market 23, no. 7 (July 2003)
No one can argue about the current moribund economy, complete with falling stock prices, nonexistent profits, layoffs, airline bankruptcies, and exploding federal and state budget deficits. People certainly have argued about the cause of this downturn, but few people have accurately pointed out why there is no recovery from the original recession.
While one hopes that this current sorry situation does not metastasize into a full-blown calamity reminiscent of the Great Depression, there are some not-so-obvious but important issues that need to be raised if we are to climb out of this economic mess.
There are a number of hidden landmines that by themselves might not have much negative effect, but combined with the other factors—like this budget-busting, conflict-fueling, capital-squandering war—ensure that economic recovery will not occur anytime soon. These barriers to recovery include tariffs and quotas, an increased regulatory burden upon private enterprise, the new emphasis upon the federal government to criminalize ordinary business transactions, and what can only be termed "tort madness."
Economists have pointed out that the Bush administration's decisions to slap tariffs on imported steel and Canadian lumber have had the perverse effects of killing more jobs than they saved—something that should not surprise our readers. The increased profits that have come to steel companies have spurred capital investment away from more efficient firms and toward the less-efficient steel makers.
In a free-market economy, capital follows its highest returns, and steel numbers right now are up. However, with the government, in effect, helping to rig the market for political purposes, capital flows out of the firms that are damaged by higher steel prices (which means layoffs) into steel.
Likewise, the Canadian lumber tariffs are part of a double-whammy to the economy. First, the US government has set vast amounts of forests off-limits to logging, which drives up lumber prices here and also forces people away from rural communities as their livelihoods are destroyed by regulations promulgated by urban environmentalists and their government allies. Second, after it has helped create the economic inefficiencies within the lumber industry, it compounds the problem by forcing up the price of lumber even higher, thus making it more difficult for new houses to be constructed. Consumers ultimately pay, and the economy contracts even more.
Toward the end of the Clinton administration, as the economy was in the midst of a nonsustainable boom, the federal government greatly increased the regulatory burdens of business, especially in the environmental and labor areas.
At the time, few people noticed, since many regulations were not scheduled to kick in until after Clinton had left office. However, they now are here, including the draconian "arsenic" regulations that if actually followed would force entire western communities either to be abandoned or to bring in nearly all of their potable water from outside sources. From the locking up of huge government tracts of land to prevent logging and mining to strict air pollution laws that drive up the price of fuel, these little time bombs have begun to explode, making it that much more difficult for firms to stay in business and discouraging new investment.
There are also the "criminal" wild cards that business owners, managers, and investors must face that did not impede previous economic recoveries, at least at the current magnitude. In the wake of the Enron and WorldCom scandals, Congress has passed a number of new "never again" laws—and the regulatory agencies have also responded with hundreds of new regulations—that further restrict the movement of capital.
On top of that, the new terrorism statutes and increased enforcement of anti-drug laws have this nasty effect of criminalizing cash transactions. Keep in mind that during economic crises, people find it best to stay as liquid as possible, as the prospect of losing everything in a wave of bank failures is intolerable to them. However, the possibilities of facing criminal charges for paying for things in cash or for doing business with overseas banks means that people with the means to invest will be more cautious than ever.
None of these things by themselves has caused the recession. Trial lawyers did not force Greenspan's Fed to recklessly increase the money supply and touch off financial bubbles; regulators did not direct capital into the mirage of the "New Economy," and federal prosecutors did not encourage people to invest in an overpriced stock market. However, once these things occurred, there was only one way out of the mess. Unfortunately, these other players are now actively blocking the exits while the economy burns.
William L. Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University (banderson@mail.frostburg.edu).
