Can We Have an Economy without Losers?
Despite President Obama’s attempts to transform what was a national credit party into a government rescue party, every economy has its share of losers. Ours can be no different. The government can intervene but by doing so, it will either make matters worse or at best shift the losses from one group to the next. Unfortunately, it seems that the Obama economic and political teams have decided to rescue almost every economic loser they can identify, with little regard for reality and the long term consequences.
Let’s explore this concept of natural losers in our economy by looking at unemployment, home ownership, and corporate survival.
Estimates for the natural rate of unemployment in our economy range from 4%-6%. In other words, even when our economy is performing well, 4%-6% of the workforce will not be working, for one reason or another. There is no long term economic benefit in trying to change these numbers. If actual unemployment goes below its natural level, high inflation is almost certain to occur.
This is one area where the government bears major responsibility for trying too hard to convert “losers” into “winners.” (Please note that I am not referring to “losers” in a pejorative sense but only to signify that certain people do not have a particular status in our economy that these people seek to achieve.)
Historically (and I mean going back decades), the home ownership rate in the U.S. hovered around 62% of households. Government activist policies pushed this rate upward beginning in the 1990′s, peaking at 69% in 2006. This represents an increase of about 6.7 million new homeowners. Guess what? That’s 6.7 million people who for one reason or another don’t need to be paying a mortgage and all of other expenses of home ownership. How do I know? Because now Obama is trying to rescue them. (For more on this, read “Taxpayers Crushed by the the Destructive Push for Home Ownership.” ) The point here is that 62% of U.S. households probably are OK owning homes but the other 38% are not. Trying to change that in our economy has proved to be a huge mistake. Those who were not qualified (under market conditions) to own homes made matters worse for themselves and for the economy as a whole by defaulting.
The government has decided that Freddie Mac, Fannie Mae, AIG, GM, Chrysler and a bunch of banks are all “too big to fail.” Billions in taxpayer dollars have been thrown at these companies. To what end? Millions of businesses fail every year in our economy. They are the market losers who were defeated by market winners.
“But we can’t let a car company fail!” Yes we can. It has happened many times before. Many of them you probably never heard of: DuPont, Pierce Arrow, Packard, Studebaker and Cord all went under earlier in the 20th century. In the ’80s, American Motors failed because of a string of awful cars. Its remaining pieces were folded into Chrysler. New car companies took their place. Kia and Hyundai are two relatively recent examples. That’s what happens in a competitive marketplace.
“But Mr. ToughMoneyLove, this time its different. The problem is so big the government must intervene.” I’m not going to spend any more time debating this because the Obama team is single-minded about aggressive rescues being the only solution. And they have the votes.
I agree that the unemployment rate is too high. And yes, the government should strategically attack that problem. After all, the government helped to cause it. But the government has overreacted to the unemployment problem by massive spending in other areas, e.g., targeting other economic “losers” through a myriad of new programs and rescues.
The government may succeed in its high energy mission to convert a wide variety of today’s economic losers into non-losers. But I contend that by doing so, the government will have created three new groups of economic losers: the next generations of taxpayers, consumers, and investors.
First, tax rates are headed up – way up, starting with the higher tax brackets. That announcement will come this week. Then the Bush tax cuts will be allowed to expire but I don’t think it will end there. Obama understands the need to control future deficits. His weapon of choice is more taxes.
Second, inflation and devaluation of the dollar are almost certain to follow, as the bills come due for all of today’s deficit spending. This will reduce consumer purchasing power as incomes struggle to keep up. What follows next won’t be pretty. For one, Social Security is tied to the cost of living. More payroll taxes will be needed to fund those cost of living increases.
Third, massive government intervention into the fiscal affairs of private businesses and homeowners could prolong the natural effects of economic failure. We could experience a “lost decade” like Japan did in the 1990′s, with the markets returning nothing. Retirees have suffered and future retirees will continue to suffer from this.
A more extreme example of government working to eliminate economic losers is the old Soviet Union and its never ending “five year” economic plans. We know how that turned out. I’m not suggesting that’s where we are headed but clearly we’ve taken some giant leaps in that direction.
Nobody enjoys watching others experience economic pain. But some pain must be tolerated in a market economy. Extending that pain or shifting it to others in a futile attempt to eliminate economic losers is bad government policy.