by Gregory Norton
I found the article “Root of Economic Crisis” by Tom Tripp informative and consistent with what I have gleaned from other articles. An excellent essay. However, [you knew that was coming] in the last paragraph but one, this sentence appears:
"The fact is that the U.S. was not harmed by the interplay between market and government power but through corrupt political power wielded by those who think they are not only smarter than the market, but more powerful, and worst of all, more important."
This thought is disturbing. First of all, in any representative government, state power is inherently political power and prone to corruption. That is the nature of the beast. Furthermore, activist government always attracts those with the itch to control others, those who think they are smarter and more important than other citizens. Recognizing this, Madison, Hamilton, Jay, et. al. designed a government of limited powers so its corrupt tendencies would be limited both in degree and in scope.
As P.J. O'Rourke observed, "When buying and selling are controlled by legislation, the first things to be bought and sold are legislators." The government power Mr. Tripp seems to find so benign is the power to arbitrarily control what is bought and sold - mortgages in this instance. Rent-seekers will lobby to achieve unfair advantages and office-holders will use their power to further their political careers. It is always thus, so liberty and prosperity depend on designing things to minimize the opportunities for government power to cause damage.
About the only way to eliminate government corruption is to get government out commerce and finance. No one will spend money to influence government to do something the government is unable to do.
Secondly, government power cannot create wealth. Government power cannot even improve processes that creates wealth. Only the extended order of human cooperation via voluntary exchange for mutual benefit based on private ownership and private control of the means of production - commonly and inadequately called "the free market" or "capitalism" - creates wealth. Government can facilitate this self-organizing, wealth-creating engine by protecting persons and property and by enforcing contracts (including punishing fraud) and by ensuring externalities are factored into economic decisions, but any efforts by state power to guide or direct or improve the functioning of the market inhibits the creation of wealth and the lifting of people out of poverty.
Government is like salt: a little bit is absolutely necessary, but more than a little is harmful.
Finally, in any interplay between market and government power, government power will dominate. Since before Adam Smith, classical-liberal thinkers have recognized that established businesses do not like the free market. Rather, established businesses (and particularly the executives in established businesses) want guarantees of profitability and protection from the uncertainties and risks of the free market. Albert Jay Nock observed, "The simple truth is that our businessmen do not want a government that will let business alone. They want a government they can use."
Market power is the power of the sovereign consumer in voluntary exchange. Government power is coercion backed by violence. What Mr. Tripp blithely calls "the interplay between market and government power" inevitably becomes the partnership of large businesses (corporations, usually) and government for their mutual benefit at the expense of consumers, entrepreneurs, and businesses too small to join the partnership.
The U.S. absolutely was and always is harmed by "the interplay between market and government power," not just because this interplay caused the current meltdown (as it caused the crash of 1929, the recession of 1937, the entire disaster of the Great Depression, the stagnation-inflation of the 1970s, the Savings-and-Loan debacle of the 1980s, to name just a few) but because government involvement is inevitably corrupt and a drag on wealth creation. Properly constituted, government power should protect and maintain conditions wherein there is no alternative but the free market.
Do you suppose it is an accident that, throughout history, the wealthiest societies have been those with the least government involvement in the economy and commerce? Is it an accident that the economy of South Korea took off when its economy was further liberalized after the death of Pres. Park? Or that India's economy is booming now that its government has backed off on control of commerce?
As Ludwig von Mises wrote:
"The nation is the more prosperous today the less it has tried to put obstacles in the way of the spirit of free enterprise and private initiative. The people of the United States are more prosperous than the inhabitants of all other countries because their government embarked later than the governments in other parts of the world upon the policy of obstructing business."
I sincerely hope the American Conservative Union Foundation will work to advance the principle that economic liberty is necessary for all human liberty and that governments exist to protect human liberties, not to guide citizens to better use of their liberties.
Respectfully, Gregory Norton |
 Response by Tom Tripp
Gregory Norton has written an accurate overview of how a corrupt political class can subvert government and interrupt the free and fair flow of commerce, almost invariably to the benefit of those mounting the interference. However, in making his judgment Mr. Norton seems to conflate all government power with political power; I do not believe it is quite that simple.
My article, “Root of the Economic Crisis,” was an attempt to clarify, because of the obfuscation by the mainstream media, how political interference in the private, free-market mortgage industry caused the fiscal disaster that has eventuated. Mr. Norton begins at a different place, but one not inconsistent with my efforts. His suggestion is that Fannie Mae and Freddie Mac, the Government Supported Enterprises (GSEs) that are neither fish nor fowl and that are at the heart of the subprime fiasco shouldn’t have existed in the first place. His contention is that their very being invites corruption because “state power is inherently political power and prone to corruption.” Overall? Yes. Always? No. There are now and always have been people who go to Washington to ensure state power remains under control—to prevent corruption.
The point at which Mr. Norton’s views and mine diverge is his belief that all power that rests in the government is actually political power. This view conflates politicians with administrators, bureaucrats, even judges. I believe that is an unfair judgment.
The majority of government functionaries and elected officials operate with the integrity necessary to allow the system to work. They stand up to corruption (intellectual, political, economic) when they can. They are not always successful. Political pressure, and more to the point, political blackmail, can overwhelm the best safeguards; in the case of the subprime mess with disastrous results. My point is this: it wasn’t the administrators or bureaucrats at Fannie and Freddie (private corporations at the time in question) that subverted the system on their own—government power was not the instigator that led to the downfall of these two institutions. It was political power/pressure from outside both entities that caused the massive distortions of their purpose and administration. That is why I contend there are three forces afoot here—government power, political power, and market power.
Government power, the ability of the administrators/bureaucrats to engage in honest administration and to stand up to political pressure illegally and unethically applied that distorted the foundation of Fannie and Freddie, was insufficient because the administrators within these institutions were corrupted themselves, primarily through economic incentives that effectively caused criminal manipulation of the books.
Market power, the ability of the entities within the free market to ensure the GSEs were being honestly run was subverted as well, again through financial incentives that presented a moral hazard (the profits were too big, too easy, and too secure to resist) and allowed the obliteration of safeguards that are normally present through the effects of transparency and due diligence.
Political power, the ability of corrupt elected officials to force the distortion of government purposes and safeguards to achieve and maintain power and/or profit proved overwhelming in the subprime mess, but it didn’t have to be that way. Government power or market power could have stopped what happened, but neither did.
Mr. Norton would like to see us return to a point where “Properly constituted, government power should protect and maintain conditions wherein there is no alternative but the free market.” That is a sentiment that conservatives dream about and libertarians demand, but as Mr. Norton, like the late William F. Buckley, Jr., stands athwart history and yells “Stop,” the plain fact is even if Jefferson and Madison were here to argue for Mr. Norton’s paradigm, Alexander Hamilton would be at center stage contending against such benign government distance. And then where would we be? Most likely right where we are.
Is Mr. Norton’s square zero, that government should not have been in this business in the first place, which would thus make corruption impossible, equally germane as my square one, that political corruption is what eventuated when no one was watching after government did get in this business? Without a doubt.
However, there is a problem with Mr. Norton’s solution, which is a call to keep government from intruding in private sector business functions. Buckley, echoing Edmund Burke, observed that conservatism requires a submission to reality, and here is the reality: Article 1, Section 8 of the U.S. Constitution lists the enumerated powers that permit Congress to act. Within that section are four clauses, viz., the power of the national government to “lay and collect taxes,” the injunction to “provide for the general welfare,” and to “regulate commerce…among the several states,” and the permission to make laws “necessary and proper” to carry out the intentions enumerated therein, that have allowed the U.S. Government, much to the indignation of many, to become what it is today,
Through myriad expansive interpretations of these clauses by the Supreme Court and the enactment of the 16 th Amendment, the political justifications of our current system are in place. Fannie and Freddie are deemed through this process to be permitted activities. Thus to return to the limited government of the Founders would require political, legal, and philosophical back-tracking at a level that is not likely feasible. That is not to say we cannot survive and even thrive with what controls are left that keep government out of our lives, but they must be implemented and administered with integrity and honesty and, when necessary, something stronger.
As a counter-point, and to raise a question that cannot be answered here but which must be considered in the broader context, what nation might the United States have become if the expansive interpretation of Article 1, Section 8 had been frustrated at each turn? The potential for the political, economic, and social Balkanization among the far more independent if not sovereign states, with commensurate rivalries, squabbles, and even internecine war, and our inability to expand the U.S. across the continent, must be considered as indictments against limited construction of the Constitution on the level Mr. Norton suggests.
The options for the electorate in this circumstance (which means all situations where political power enters the fray) come down to two: first, ensure through overt citizen participation that we elect people who understand the actual, intended limitations of Article 1, Section 8 so we are able to reduce the size and breadth of government. Second, after elections there must be ever-vigilant citizen oversight of all 3 branches of government to ensure that the Founder’s exquisite understanding of the intended limitations of Article 1, Section 8 are not exceeded or exceeded only in those situations where the fate of the republic is in doubt, and that such excesses are rescinded when any potential Armageddon is resolved successfully. Citizen engagement is the only answer to the age-old question: who regulates the regulators?
Obviously we have gotten to the point where the electorate is unlikely to consistently take on such responsibility, no matter the ease by which this involvement might be effected. In the electorate’s stead, there are many citizen groups that directly challenge government overreach (too many to enumerate here), but their number and size are dwarfed by the massive presence of the federal government—we need many, many more.
Overall Mr. Norton’s frustrations and mine are in sync. The fact that we begin our respective assessments of what went wrong at sequential points along the governance continuum allows us to come to the same conclusions.
Yet, to bring our dual assessments full circle, I’m afraid I still have to stick by my contention (with which Mr. Norton has taken issue) "…that the U.S. was not harmed by the interplay between market and government power [Wall Street and Fannie and Freddie] but through corrupt political power [Barney Frank, Harry Reid & Co.] wielded by those who think they are not only smarter than the market, but more powerful, and worst of all, more important." In other words, in my view, it is still the human condition that allows for the distortions extant in the subprime fiasco no matter how sound are the institutions or the rules by which they operate. Human beings can attempt to subvert any institution or set of rules. They can also be stopped in their intentions if the rest of us pay attention. Whether misunderstanding or even misusing the important restrictions the Founders placed on the governors in Article 1, Section 8 is the issue or if it is garden-variety corruption of which any legislator is capable, the result is the same, as is the solution: citizen vigilance that oversees smaller (but in our case not very small) government.
As Jefferson observed: the obligations of the citizens are not completed when we put down our pencils after marking our ballots. Even if our involvement is nothing more than a contribution to the self-actuated public watchdogs, we can each become and stay engaged and thereby fulfill the call of the Founders. |
