Government interference in a nation’s economy can be as misguided as trying to legislate the sun’s movements. Yet, governments, including the United States, engage in this kind of interference daily, often with both good intentions and detrimental outcomes.
Over time, various layers of regulation imposed by federal, state, and local agencies have accumulated, resembling the grime on a neglected window. This government “grime” seeps into every aspect of the economy, overshadowing genuine transactions.
Currently, even a simple visit to your barber or your favorite café is laden with government restrictions. Has your barber met all the licensing requirements and paid the necessary fees? Is your barista’s espresso machine compliant with health regulations? Are the paper cups used for your coffee environmentally approved? Did your drink reach the maximum allowable temperature? Did state and local entities collect their taxes on the purchase?
When it comes to significant financial transactions, the impact of government interference becomes even more glaring. For example, the cost of an appendectomy in the United States can be exorbitantly higher—up to ten times that of the same procedure in Mexico. Is the American version truly ten times better?
This phenomenon is not new. Governments have been placing their marks on commerce since society first granted them authority. The public has grown accustomed to this interference, often viewing it as a necessity for improving quality of life.
However, interventions like price controls and wage regulations often lead to chaos. Prices, wages, and resources operate independently, beyond the reach of legislation. When a government sets an artificial price below the equilibrium, it results in scarcity and shortages. For instance, if the price of bread is mandated below the cost of wheat, bakers may simply choose to pursue other opportunities.
Credit Market Intervention
One of the most insidious forms of government interference occurs within the credit market. Many fail to recognize this intervention, misattributing its consequences elsewhere.
Take wage stagnation, for example, which is often blamed on greedy corporate leaders outsourcing jobs. In reality, it’s a byproduct of a monetary policy that hinders genuine capital formation and favors asset price inflation. Unfortunately, few venture to seek the deeper truths behind these issues.
In the last decade, we’ve witnessed unprecedented experiments in monetary policy. The Federal Reserve slashed the federal funds rate to nearly zero in December 2008 and maintained it until December 2015—an entire seven years. Since then, they have incrementally raised the rate, now up to 1.25 percent after four increases. The upcoming Federal Open Market Committee (FOMC) meeting could see another rate hike, with anticipated increases throughout 2018, assuming the economy remains stable.
As the Fed attempts these rate hikes, they are also reducing their balance sheet, selling off some of the nearly $3.6 trillion in government and mortgage-backed securities accumulated during their Quantitative Easing program. This shift effectively shrinks the available credit in the economy.
It’s easy to foresee the consequences for an economy heavily reliant on low-cost, plentiful credit. But how does this correlate with the GOP’s recent tax bill?
The Zealous Pursuit of State-Sponsored Collapse
David Stockman, former Director of the Office of Management and Budget under President Reagan, provides insight here. With over forty years of experience in economics, Stockman offers valuable perspectives on tax policy, budgets, and their broader impacts. He asserts:
“Not all tax cuts yield the same results. Their effects depend on: (1) which taxes are cut; (2) how any revenue shortfalls are managed; (3) at what point they occur in the business cycle; and (4) their influence on fiscal stability.”
“Our point is that the GOP fails to meet the criteria on all four counts. A deficit-financed tax cut is always a poor choice, especially late in the business cycle when facing a growing structural deficit exacerbated by demographic pressures on entitlement spending, all while dealing with an unusual cycle of monetary tightening.”
In simpler terms, an “F” grade denotes failure. Financing tax cuts by borrowing against future earnings is a recipe for disaster. Consequently, the recent GOP tax cuts mark another failure in the relentless quest for state-sponsored collapse.
As a side note, since we cautioned against purchasing bitcoin above $11,000 last week, the cryptocurrency has skyrocketed to over $19,000—an increase of more than 70 percent in just a week. While our stance remains steadfast, it’s worth noting that sometimes those deemed foolish can still enjoy surprising windfalls.
Sincerely,
MN Gordon
for Economic Prism
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