Laissez Faire Is Best Medicine
Boudreaux, Donald J., Tribune-Review/Pittsburgh Tribune-Review
I'm writing these words only days after the Federal Reserve injected several million additional dollars into the economy. The recent steep decline in stock values, apparently sparked by the collapse of the subprime mortgage market, has lots of people plenty worried.
They worry not only that bears will populate Wall Street for an extended stay but that all this bearishness will drag the economy into a deep and long recession. And a recession -- with lots of unemployment and sluggish (or even negative) growth in output -- spells hardship for many ordinary Americans.
I, too, am a bit worried. But my worry is not about the market's ability to handle the consequences of bubbling housing prices and bankrupt mortgage lenders. It is about how government will react to these events.
The ever-present demand to "do something" is unfortunately immune to the wisdom counseling that there are some problems best left to sort themselves out. Government efforts to "solve" market adjustments and dislocations typically -- and at best -- supply only short-run relief while making the longer-run situation more dire.
The most famous such intervention is Franklin Roosevelt's New Deal. Still commonly regarded as saving America from the Great Depression, this spasm of interventionist government did no such thing.
On the eve of entering World War II in 1941, America's economy was still quite depressed -- as it had been for more than a decade. And as economic historian Robert Higgs shows in his 2006 book, "Depression, War, and Cold War," New Deal policies and the prevailing climate of ideas from which they sprang suppressed investment.
The New Deal and the genuine risk of outright socialization of industry in the 1930s kept the American economy in deep doldrums for a much longer time than would have been the case if Uncle Sam just said "laissez faire" and had conspicuously ignored all the Very Smart People who clamored for socialism. No investor, after all, wants to put his assets at stake in a country whose government might tax away or outright confiscate these assets.
And just before FDR won his first term in the White House, Congress passed, and President Herbert Hoover signed, the now- infamous Smoot-Hawley tariff. This tariff hike in June 1930 raised tariffs to heights not seen before or since. The idea was to stimulate employment in America by making it much more expensive for consumers in the U. …