Recently, former Secretary of the Treasury and current Obama economic adviser Lawrence Summers addressed a private audience at a dinner sponsored by the US Chamber of Commerce. His remarks centered around “boom and bust” cycles in the US economy. Here is how he described the situation:
“An abundance of greed and an absence of fear on Wall Street led some to make purchases – not based on the real value of assets, but on the faith that there would be another who would pay more for those assets. At the same time, the government turned a blind eye to these practices and their potential consequences for the economy as a whole. This is how a bubble is born. And in these moments, greed begets greed. The bubble grows.
“Eventually, however, this process stops – and reverses. Prices fall. People sell. Instead of an expectation of new buyers, there is an expectation of new sellers. Greed gives way to fear. And this fear begets fear. …
“It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind when he famously observed that the only thing we had to fear was fear itself. It is this transition that has happened in the United States today.”
Summers could have made those exact same remarks in March of 2003, following the collapse of the tech-heavy NASDAQ index (which shed nearly 80% of its peak value), the spectacular self-destruction of previously hot dot-com properties like Boo, Flooz, EToys, and WebVan, and the implosion of major corporations like Enron, Global Crossing, and WorldCom. Except at that time, it would have been a Democrat Administration led by Bill Clinton, and Summers himself as Treasury Secretary, who “turned a blind eye” to the controversial accounting and stock trading practices during the late 1990’s that created the “tech bubble.”
No self-respecting liberal would ever describe himself, or the liberal movement, as “greedy.” Instead, liberal Democrats dream of ending boom and bust cycles and replacing them with a steadily expanding economy managed by a compassionate government. Most liberals seem to like the free market as a mechanism for creating wealth, but believe that markets are too easily manipulated by the wealthy. Social justice, then, requires that government must tightly regulate the distribution of wealth.
Yet contemporary liberal Democrats have been continually derailed from this mission because rapid economic growth provides such a golden opportunity for government to siphon the resources of wealthy individuals and successful businesses, and then build bigger bureaucracies that can redistribute those resources. Their appetite for tax revenues has led them to support dangerous and economically unsound rapid growth policies time and again; and when those policies fail, they blame the failures on Wall Street and the Republican party and then demand an even bigger government as the solution.
Now comes Barack Obama. Perhaps in an effort to forbear and atone for the sins of the members of his own party who peddled influence, wrangled sweetheart deals, grew rich off lobbyist money, forestalled investigations, and fought to cripple regulation and oversight of the mortgage industry, he has expressed a strong desire to “correct” the wayward policies enacted by Republicans during the 14 years that the Democrats did not have absolute control over Washington, DC. And chief among those “corrections” is the implementation of a number of tax increases that will strip those in the nation’s top 1% earnings bracket of a major portion of their income and empower the government to redistribute that wealth as it sees fit.
Unfortunately, such schemes never work as intellectuals envision them. Instead of prosperity, large scale confiscation and redistribution of wealth has historically resulted in a steadily decreasing supply of wealth. In a free market economy, where individuals are free to create capital based on ingenuity, talent, and hard work, income is not generated by stealing wealth from others; rather, it is generated by the very act of capital creation. When the highest income earners (who are by definition the biggest creators of capital) become at first resentful, and then fearful of crippling government regulation and taxation, their output falls. Thus the supply of capital available for confiscation shrinks.
And just like the free market entrepreneurs that they despise, socialists have a curious habit of never being satisfied with what they have. “Fairness” can never be exactly defined, yet it always seems to involve “more.” As confiscation dampens incentive, and capital production decreases, government will demand a bigger share. Taxes then become a heavy burden for everyone, not just the “rich.” Thus the greed of the government stops the economy dead in its tracks.
This is why financial analysts, investors, and conservatives in general have been so alarmed by the Obama Administration’s new plans to drastically increase taxes and government regulation. These things slow down economic growth, and during a recession the worst thing possible is an economy that continues to shrink. In fact, we question the morality of such a move, since we admittedly have trouble understanding how policies that have been historically proven to deepen existing recessions will result in true prosperity for anyone, even those who might receive a bigger share of redistributed wealth. Social justice then becomes irrelevant, as these policies will simply be very damaging to the US economy.
As I explained in an earlier post, there seems to be some degree of religious faith on the part of the Obama Administration with respect to economics. Specifically, there seems to be a strong belief that government growth, increased taxation, and economic growth can all occur smoothly together. And when that happens for an extended period of time, we will magically begin the journey toward utopia. Unfortunately, history teaches us differently.
Greed in and of itself is not a good thing, but allowing people to keep a satisfactory portion of what they create has always been the single greatest incentive for entrepreneurs to take risks and create capital. And when the government doesn’t interfere — either with ill-conceived incentives that spur boom-bust cycles, or heavy taxation that cripples economic growth — then everyone prospers.