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Wednesday, October 01, 2008

Not facing a Great Depression

Here are a couple of good articles on the bailout (and the rhetoric in favor of it) by Cato scholars.

Alan Reynolds writes that "saying we're in for another Great Depression unless we 'do something' right away" is unreasonable, and ignores the history lesson of the actual Great Depression.  That 5,000 banks failed (as opposed to a dozen in jeopardy today) only after Hoover "did something" - namely increase taxes, increase tarriffs, and create the Reconstruction Finance Corporation.  While Reynolds writes that the "Hoover analogy flunks," I find it to be apt.  Hoover, like Bush, intervened heavily in the economy, but (also like Bush) is portrayed as a hands-off, market-oriented, do-nothing president.  Government intervention is largely to blame for the financial crisis, just as it was for the Great Depression.  And more government internvention is proposed as the solution.

Dan Mitchell explains why the bailout is bad for America.  He explains both how government caused the current crisis, and how similar actions hurt the Japanese economy in the 1990s.  Among the effects he sees are slower economic growth, encouraging imprudent risk going forward, and increased corruption.  What's not to love? 

Another good read is this "Open Letter to My Friends on the Left" by professor Steven Horwitz.  The key passage:

I know, my friends, that you are concerned about corporate power. So am I. So are many of my free-market economist colleagues. We simply believe, and we think history is on our side, that the best check against corporate power is the competitve marketplace and the power of the consumer dollar (framed, of course, by legal prohibitions on force and fraud). Competition plays mean, nasty corporations off against each other in a contest to serve us. Yes, they still have power, but its negative effects are lessened. It is when corporations can use the state to rig the rules in their favor that the negative effects of their power become magnified, precisely because it has the force of the state behind it. The current mess shows this as well as anything ever has, once you realize just what a large role the state played. If you really want to reduce the power of corporations, don't give them access to the state by expanding the state's regulatory powers. That's precisely what they want, as the current battle over the $700 billion booty amply demonstrates.

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