Washington's Fatal Conceit

October 22, 2009

Whether it’s the $700 billion TARP, the $787 billion stimulus package, or the late not-so-great Cash for Clunkers, policymakers are demonstrating that they’ll spare no taxpayer expense to “fix” the economy. The present recession has its roots in government policy, but whoever caused it, is the federal government even theoretically capable of righting the economic ship?  

Nobel Laureate economist F.A. Hayek labeled the belief that central planners could better direct economic activity than the marketplace as the “fatal conceit.” Writing in the peer-reviewed The Economist’s Voice (hat tip: Arnold Kling), UCLA’s Prof. Bradford Cornell sounds a similar theme in pointing out that the government’s efforts to revive the economy could prove to be counterproductive
To the extent that the government becomes involved in restructuring financial institutions, it should avoid any unnecessary wealth transfers from taxpayers to the security holders of the financial institutions. Beyond that, the realignment process is best left largely to private agents. The government has neither the necessary information nor the proper incentives to do the job. 
Just as a command and control economy is invariably less efficient at resource allocation and production than a market economy, a general stimulus program will, in all likelihood, lead to highly inefficient allocations, effectively burning resources at a time when they are particularly scarce and particularly vital to restart and re-align our beleaguered economy. To the extent that it is used to prop-up industries destined for decline, the stimulus could even prove harmful by delaying necessary adjustments or by potentially creating further misalignment.

Americans are becoming conditioned to look to elected officials for activist solutions to crises. Activist solutions generally don’t work, and in most cases markets will right themselves over time if they are simply left alone.

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