Saturday, October 13, 2012

The Uncertainty Trade-Off

The main reason that free markets struggle to achieve political legitimacy is that outcomes can be unpredictable.  There can be booms, busts, cycles, and anxiety.  In a regime like the old Soviet Union, there was no anxiety and no booms and busts.  There was simply perpetual stagnation.  Is there anything in between these two alternatives?

Probably not.

The idea of a 'mixed economy' is a common staple of university courses in economics and politics, but one wonders if a 'mixed economy' is a stable outcome.  Once a large part of the population derives its income from government, then a 'mixed economy' has a tendency to move more toward a government-dominated economy.  People vote their economic interests.  Public school teachers, once the most conservative voters in America are now among the most liberal voters.  Why?  They vote their economic interests, which they identify with the liberal economic policies that expand government and boost the compensation for public employees generally.

The modern political debate is a debate about whether the current political dynamic will take the US in the direction of the old Soviet model or try to apply the brakes before things become irreversible.   Unfortunately, there is no real political support for truly free markets (the acid test would be the public attitude toward abolishing minimum wage laws).  The best that can be done is to try to slow the growth of the power of our government overlords.

The heavy hand of government has crushed our financial system and put our economy in a straight jacket. It can get worse.

But, things could get better.  Just freeing up our financial system could spark a major economic recovery in the US.  Whether a Romney administration would have the political courage to roll back the damage done by Sarbanes-Oxley and Dodd-Frank is debatable.  But, there is no chance that the US economy can prosper if  Obama is re-elected.  Only government will grow in the Obama blueprint for America.