Hendrickson’s View

Mark W. Hendrickson

Mark Hendrickson is an economist who recently retired from the faculty of Grove City College, where he remains a Fellow for Economic & Social Policy for the College's Institute for Faith and Freedom. These articles are from The Epoch Times and The Institute for Faith and Freedom, an online publication of Grove City College.

How Much Should Government “Help the Economy”?

The coronavirus is disrupting our lives at a dizzying pace.

The NBA, NHL, MLS, and fledgling football league XFL have suspended their seasons. College basketball’s “March Madness” first thought about playing the tournament in the eerie silence of empty arenas, but then just canceled it completely. Tom Hanks has the virus. Broadway is shutting down, and the stock market has been plunging at a sickening pace.

Nothing is normal right now.

Question: What should the federal government do to help us through these challenging times? The difficulty here is that two distinct problems have been conflated. Americans are understandably concerned about dual threats: one to our physical health, the other to our economic well-being.

What the government should do in response to the threat to our health is obvious: marshal and facilitate efforts to contain and treat the virus.

What the government should do in response to the economic threat is much less clear.

There are dozens of suggestions for how the government should cushion the immediate economic impact of the virus and, going forward, avert a recession. The first of those two goals — helping Americans weather the virus-related economic storm — is worthwhile. The second goal — government intervention to ward off a recession — is not.

This is going to take some explaining, so please bear with me. As an economist, I have found that government intervention in economic affairs tends to help special interests while impeding overall economic progress. Yet many people believe that governments are endowed with some sort of superior wisdom that enables them to arrange our economic affairs into a satisfactory order. This is a myth. Look, if governments were that brilliant and competent, the whole world would be socialist today.

Some forms of government aid are more effective than others. Foreign aid provides a helpful object-lesson. Let us compare emergency aid with typical foreign aid designed to boost the economic development of countries.

Emergency aid, such as when the U.S. Navy deployed personnel and medical supplies to people in Indonesia after the devastating 2004 tsunami, saves lives. Even though the constitutionally stipulated purpose of our military forces is to defend American lives, Americans have a generous, compassionate heart, and we don’t begrudge such emergency assistance.

Foreign aid, by contrast, is less effective and less justifiable. Its track record is problematic. In fact, studies by economists such as Zambia’s Dr. Damisa Moyo and Nobel Prize winner Angus Deaton have shown that foreign aid too often has retarded economic progress by bankrolling entrenched governments that are corrupt or inept. The efficacy of foreign aid also is limited by the same problem alluded to above — the superstitious belief that government planners can arrange a successful economic division of labor from the top down.

Now, let’s come back home. Today, with millions of Americans reeling from the economic blows of the virus, what should Uncle Sam do?

Although there will doubtless be opportunistic, wasteful, and cynical political add-ons attached to any relief measures, emergency aid nevertheless is a compassionate step to take. Nobody should suffer eviction or hunger because some virus has shut down their place of employment or left them confined to quarters.

One proviso: Any emergency aid measures should include a sunshine date — e.g., a stipulation that 30 days after the president declares the medical emergency over, the emergency expenditures shall cease.

By contrast, there should be no intervention by either the Federal Reserve or Uncle Sam to try to avert a recession. This sounds harsh and uncaring, but please understand that I don’t like recessions any more than you do. But underlying my position is an inescapable economic truth: A recession is a time of painful, but necessary economic adjustments.

What happens in a recession is that less-efficient businesses fold, releasing their hold on valuable economic inputs (land, labor, and capital). That clears the field for entrepreneurs with new value-creating ideas. Call it the growing pains of capitalism or the cost of creative destruction or bitter medicine, but recessions are necessary for healthy long-term economic growth.

An analogy from the physical world is a useful metaphor. What did this year’s horrific wildfires in Australia have in common with the great conflagration that consumed half of Yellowstone Park in 1988? In both cases, the fires were preceded by well-intended but unwise human intervention.

It had been official policy to diligently extinguish small fires for years and to prohibit the removal of dead plant matter (also known as “kindling”). By preventing periodic smaller fires that would periodically reduce accumulated kindling, the potential for larger fires kept increasing. Eventually, a trigger event would ignite catastrophic fires. Instead of putting up with periodic smaller adjustments that were necessary to the long-term health of forests, human interventions made large conflagrations inevitable.

And so it is in our economy. When government and central bank interventions keep weaker businesses from folding, in the short run, they lessen economic pain. In the long run, however, they trade periodic small adjustments for a much larger, much more painful economic realignment. Postponing necessary adjustments causes eventual much larger adjustments.

Another question: Is the early 2020 stock market rout the beginning of a major recession? Is this “the big one”? It could be. The artificially low interest rates engineered by the Federal Reserve over the past dozen years have provided life support to numerous corporate zombies and financial weaklings. Had interest rates been at more realistic and historic levels (i.e., higher), many of these moribund companies would have given up the ghost long ago and been replaced by vigorous new entrepreneurial ventures.

The current inventory of economic “dead wood” would be much smaller, meaning that the effects of an economic downturn in 2020 would be much less severe than they will be now.

From an economic standpoint, the best thing that government can do in convulsive times like today is to get out of the way and let the invisible coordinating hand of markets sort things out and lay the foundation for a prosperous future.

From a political standpoint, however, America’s political and monetary authorities feel compelled to intervene (especially since this is an election year). They feel this way because most Americans place entirely too much faith in government competence and expect the authorities to act.

Ironically, in carrying out the will of the people, the powers-that-be will impede some of the very adjustments needed to get our economy back on a sound, healthy footing.

After Afghanistan and Iraq, What?

At the end of last month, representatives of the Trump administration and the Taliban signed an agreement that could mark the beginning of the withdrawal of U.S. troops from Afghanistan after more than 18 years there.

The reaction here in the United States has been decidedly muted, even before everything else was eclipsed by the coronavirus. Why? I think there are several reasons.

We are depressed. Our military has been fighting to keep the Taliban from ruling Afghanistan for 18 years, yet now we are preparing to withdraw and it looks like the Taliban will prevail.

Perhaps we are pessimistic. There are several conditions that still have to be met for the peace deal to be consummated, and we’re not confident that the Taliban will comply.

Maybe we’re just numb. The conflict has been going on so long that the majority of Americans who don’t have loved ones deployed there have tuned it out.

I’ve been brooding for many months over our military involvement in Afghanistan (Iraq, too). I feel the same kind of consternation that I did during the Vietnam War. The three presidents we have had during this war have failed to communicate to us why we are there and what it would take to bring our military forces home.

Indeed, it seems like the public has been deliberately misled. Worse, we haven’t been fair to our men and women in uniform. Year after year, they have had to risk their lives in a no-win war, just like in Vietnam decades ago. Young Americans have been dying in southern Asia, and most Americans don’t even know what for. That’s pathetic and tragic — a total disgrace.

The conflicts in Afghanistan and Iraq have been taking a heavy toll on our troops. There were periods last year during which the military’s recruitment needs were not met. That meant that troops who had already been separated from spouses and children for too long had their overseas deployment extended.

We need to think of our fellow Americans in uniform more than just on Veterans Day. Many of these good people return home with scars that we can’t see — scars that are often more painful than the physical ones. Everyone should read the superbly told somber story of U.S. Marine Col. Randy Hoffman, whose dedicated and decorated service in Afghanistan has caused so much pain to the inner man.

Going forward, what lessons can we learn from our prolonged military presence in Afghanistan and Iraq?

I’m no military expert, but I humbly offer three principles that I hope are worthy of consideration: 1) Remember that the purpose, the raison d’être, of our armed forces is to protect and defend the lives of Americans; 2) Don’t initiate military action without a clearly defined and attainable objective; 3) Achieve that objective as quickly as possible, declare victory, and bring the troops home.

President George W. Bush at first upheld all three of those principles in Afghanistan. The original reason for deploying armed forces there was to eliminate terrorist training camps. Remember, this was right after 9/11. The notion of terrorist attacks on American soil was no mere theory, but a vivid reality.

Bush authorized a military operation with a clear objective: find and destroy any terrorist camps there. Our military’s execution of the plan was superb. With fewer than 300 pairs of boots on the ground, U.S. Special Forces joined with non-Taliban Afghans and achieved a quick and decisive victory. Their strategy was to engage Taliban forces in long-distance gunfights, then call in fighter jets to annihilate the enemy. Within a few months, over 30,000 to 40,000 Taliban fighters had been killed, their regime collapsed, and there were no known terrorist camps operating in Afghanistan.

However, Bush then made the fateful decision to embark on nation-building — supporting the establishment of a democratic government in Kabul. In doing so, he abandoned those three principles: 1) No longer were American troops fighting for Americans; they were building schools; 2) There was no longer a clearly defined military objective; 3) There was no route to a quick, decisive victory following which troops could be brought home. Instead, over 3,000 Americans have lost their lives there.

Frankly, it isn’t for us to decide how or by whom Afghans are to be governed. In fact, should we really be surprised that in a country of long-warring tribes, the members of non-U.S. backed tribes want to defeat those Afghanis allied with what appear to them to be infidel imperialists?

Nor, cold as it may sound, should U.S. troops be dying so that Afghan girls can go to school. (Those girls should be able to go to school. Neither should there be slavery in the world, nor the kind of oppression that the Communist parties in China, North Korea, Cuba, and Venezuela are imposing on their people, but we aren’t deploying troops to right those wrongs. The fact is, we can’t keep sacrificing American troops to solve all the world’s problems.)

Simply put, after the Taliban regime fell, Bush should have kept our military action purely defensive by rotating in a small number of Special Forces to monitor terrorist activity and identify terrorist installations, nothing more.

The younger Bush should have learned a lesson from his father. Bush the elder organized a U.S.-led multinational military coalition (Operation Desert Storm) with the specific objective of expelling Iraqi forces from Kuwait. We can debate whether that operation was, strictly speaking, to defend Americans, but the elder Bush deserves credit for setting a clearly defined objective and enabling our military to score a decisive victory that brought troops home quickly.

Had Bush done what many armchair generals wanted at the time and sent our troops on to Baghdad, U.S. military forces almost certainly would have been bogged down there for years — as indeed happened a decade later under Bush the younger. In the latter case, our forces didn’t find the weapons of mass destruction that faulty intelligence had said were there, but “W” could have cut American losses once Saddam was found by simply declaring victory and bringing the troops home.

Instead, he committed to a long-term effort to “fix” Iraq and asking our troops to support the establishment of a lasting democratic government (just like in Afghanistan). The result? A quagmire costing over 4,400 American lives and nearly 32,000 injured.

Whenever we do extricate our military people from Afghanistan and Iraq, let us resolve to never put our people in harm’s way except to protect American lives. Let us never ask more of them again. Even though we are months removed from Veterans Day, I’d like to thank all our veterans for their service to our country. You are the best and you deserve the best treatment that we can give you.

Two Cheers for Capitalism?

Last month, a friend forwarded a link to a hugely important article by David Brooks. Title: “I Was Once a Socialist. Then I Saw How It Worked.” Subtitle: “Two Cheers for Capitalism, Now and Forever.” This was a truly astounding article for two reasons.

First, I was astounded that this article was published in The New York Times. Brooks is the Times’ resident (token?) relatively conservative writer, but still, in light of how overwhelmingly the The New York Times favors the socialist Democrats, it’s stunning (and admirable) that they gave space to a dissenting opinion on the central issue of the 2020 national election: socialism versus capitalism.

The other reason I consider Brooks’s article astounding is its sheer power. He brilliantly dismantles the pretenses of socialism with devastating directness, uncommon clarity, and relentless truth. Time after time I was so impressed with Brooks’ eminently quotable, crystalline explanations that I mentally gave him the greatest compliment one writer can give another: I wish I had written that.

Brooks assembled all the main reasons why capitalism is superior to socialism. He did so not as an economic theoretician, but as a down-to-earth journalist. Brooks traced my own earlier ideological odyssey. In college, we were enthusiastic supporters of socialism. Out in the real world, observation led him to the only reasonable conclusion: Capitalism dramatically advances human prosperity; socialism retards, undermines, and ultimately obliterates prosperity.

He reels off fact after telling fact:

“Capitalism has brought about the greatest reduction of poverty in human history.”

Socialism destroys incentives to improve.

Socialism lacks the price signals needed to rationalize and coordinate economic production.

Socialist central planners “can never gather all relevant data, can never construct the right feedback loops” or possess all the specific knowledge needed to master, improve, and update modes of production.

Countries that adopt capitalism get wealthier. Countries that adopt socialism get poorer.

Environmental degradation is much worse in socialist countries than in capitalist societies.

Average human life expectancy is noticeably longer (14.2 years) in capitalist countries.

Socialist “rulers turn into gangsters. A system that begins in high idealism ends in corruption, dishonesty, oppression and distrust.” Contrary to all the socialist rhetoric about “equality,” actual socialism “produces economic and political inequality.”

As superbly as Brooks articulates why human societies need to embrace capitalism and avoid socialism, his article nevertheless ultimately takes an unfortunate turn. He prints a wish list for government intervention to address some of the economic and social problems that capitalism hasn’t solved.

He calls for “wage subsidies and mobility subsidies,” “tax subsidies for health care,” “a massive infusion of money . . . into our education systems,” and so on. (Now it becomes clear why The New York Times published this article.)

It’s unarguably true that free markets haven’t solved all economic problems. Unfortunately, here Brooks falls for the same non sequitur that animates all progressives and socialists: the notion that if one has a vision for how to help one’s fellow man, then one is justified in using government power to compel others to pay for wanted reforms.

Would-be reformers aren’t content that, under capitalism, they are perfectly free to use their own time, energy, and financial resources to work — either individually or in voluntary cooperation with others — to open businesses that pay higher wages, establish foundations dedicated to helping workers relocate, open better schools, and so on.

The presumption that one is morally qualified to enlist the power of government to force others to bear the burden of one’s own vision for a better society is the seed from which tyranny grows. It’s an assault against individual liberty. Indeed, it’s self-contradictory for Brooks to advocate capitalism and then assert that the state should have the power to redistribute wealth, thereby abridging the property rights that are the essence and basis of capitalism.

Furthermore, his vision of “capitalism with modifications” is politically naïve. Brooks isn’t a leftist revolutionary, but a moderate whose intentions are benign, but he too glibly assumes that all reasonable people will agree with him as to what particular interventions are needed. There’s no such agreement today, nor any reason to hope for such an agreement to evolve.

The problem with using government to help A and B with certain economic needs is that C and D need help, too, with other economic needs. A Pandora’s box is opened. There’s no bright line to mark where government intervention should stop. Once the progressive/socialist tenet is accepted that it’s the government’s duty to actively boost citizens’ economic wellbeing (in contrast to the more limited traditional role of American government to keep citizens safe and free — a system that led to the United States becoming the wealthiest country in the world), the role of government becomes infinitely expandable. This is the road to socialism.

The myriad forms of federal intervention already in place have saddled our youth with tens of trillions of dollars of government debt and unfunded liabilities. That Brooks apparently is willing to increase that debt burden even more is, frankly, disappointing and appalling.

It’s perplexing that Brooks (given his understanding of socialism’s deficiencies) calls for a large increase in government involvement in different areas of the economy. Can’t he see that government intervention tends to raise prices — e.g., in health care and higher education? This apparent blind spot is especially strange given that his article correctly identifies government’s inability to achieve efficiency because it operates outside of market prices. That precisely is the inescapable problem in any government bureaucracy. (See Ludwig von Mises’ 1944 book Bureaucracy.)

Think about it: What is socialism but a complete system of government bureaucracies? The lengthy track record of bureaucratic waste and inefficiency in our own country provides us with a sneak preview of what conditions would be like under the total bureaucratic mismanagement of socialism.

As noted above, Brooks subtitled his article, “Two Cheers for Capitalism.” By this he means that while capitalism has been a great boon to the human race and is worthy of our praise and gratitude, it hasn’t produced perfect results. On this point he is absolutely correct. However, like many people of good will, Brooks is at least somewhat under the beguiling but treacherous influence of utopianism. He is holding “three cheers” of approbation in reserve for perfection.

But this is the human reality, utopian dreams notwithstanding: Perfection will forever be unattainable in human societies comprising manifestly imperfect human beings. Capitalism is no panacea, because there are no economic panaceas.

Unlike Brooks, I believe strongly that capitalism deserves three cheers — not because capitalism is or ever can be perfect, but for the salient fact that it’s by far the best system for prospering humankind that the world has ever known. Brooks’s article itself makes that very point. We shouldn’t let the perfect be the enemy of the best. Three cheers for capitalism!     *