“The only insecurity which is altogether paralyzing to the active energies of producers,” wrote John Stuart Mill in Principles of Political Economy, “is that arising from the government, or from persons vested with its authority. Against all other depredators there is a hope of defending oneself.”
Let go back to December of 2001 when Enron went bankrupt. Understand what a big deal this was. Not long before it was viewed as the bluest of blue chip companies; one led by some of the smartest people in the world. Roughly eight months later another major American company by the name of Worldcom went under. Yet despite these earthshaking events stock markets were largely sanguine; the DJIA down roughly 3% during the time in question.
It was only after the bankruptcies that markets cratered. Translated, Congress and the Bush White House inserted themselves into the situation post-Worldcom with Sarbanes-Oxley. “Sarbox” threatened CEOs with jail if their accounting was incorrect, and President George W. Bush signed the bill into law with great gusto. He enthused to reporters that the legislation was the “toughest anti-corporate crime law since FDR.” It was lost on Bush that FDR was not someone to mimic; that he presided over extraordinary economic sluggishness from 1933 to 1939 when, so discredited was his New Deal among Republicans and Democrats, that it for all intents and purposes ended.
Needless to say, markets corrected not in response to the bankruptcy of two prominent companies in 2001 and 2002, but in response to the federal government’s reaction to the bankruptcies. Governments always create solutions worse than the problem. Sad is that Republicans keep learning this obvious lesson after the fact. In case readers have forgotten, the same President Bush decided in 2008 that the “market is not functioning properly” on the way to his Administration fanning the flames of a “crisis” that had little to do with finance, and everything to do with government intervention in the natural workings of an economy on the mend.
It’s too easily forgotten that economies are just individuals, and recessions signal individual improvement taking place as those individuals correct bad habits, migrate to work more suited to them, and replenish their finances through more saving.
Economists naively focus on spending as the driver of prosperity, but is the economy of any individual improved by endless waste? Obviously not. Endless, gluttonous consumption is bad for the individual, and it’s bad for the economy in total. When individuals are prodigal, capital availability for businesses shrinks. Capital availability for businesses grows as individuals improve their own economic situations by saving. Individual spending caution amid downturns essentially sets the stage for rising growth in the future.
Fast forward to today, a virus that revealed itself in China first led to a pullback in economic activity there. Given the global cooperation involved in all production, this pullback was logically going to weigh on economic activity stateside. But in a normal world free of government meddling, the slowdown would have been self-correcting for the reasons described above. Slower growth would lead to more individual prudence, and subsequently greater capital availability for businesses. The problem was that in a repeat of history, governments around the world stepped on the free part.
The hysterical mayor in Austin, TX, canceled South by Southwest, thus devastating businesses in the city. Cities across the U.S. are declaring states of “emergency” that threaten businesses more broadly. Italy’s politicians put parts of the country on lockdown, such that citizens literally need “papers” to get around. In Washington, Republicans who used to know better clamored for the Fed to “slash” interest rates on the naive assumption that governments can magically expand credit availability. They called for “targeted” government spending, travel restrictions, etc.
This has been odd. Republicans are rhetorically skeptical of government action precisely because government spending blunts the laudatory impact of greater private sector capital formation, plus the very notion of government intervention messes with the market’s natural direction to the economy’s detriment.
Which brings us to President Trump. Though Trump is right that the crisis isn’t financial, he somewhat doth protest too much. Markets seem to be saying through equity prices that there is a crisis of too much government response to that which many say doesn’t pose a major threat, and Trump leads the federal government.
And if Coronavirus is a major threat? If so, why has Trump assigned Vice President Pence to the job of orchestrating a response to a health scare? Why didn’t he instead make plain in his address on Wednesday night that free markets and free people are always the best solution to problems big and small? He should have, or could have said, “While I think the worry about Coronavirus is overstated, assuming it’s not it cannot be stressed enough that the most effective way to fight a threatening illness is for private, profit-motivated markets to match capital with creative, profit-motivated people. We don’t go to government for our day-to-day needs, so why on earth would we rely on government during what some say is a crisis?”
Republicans talk a good game about the genius of markets, but any time they don’t like the message of the markets (see Enron, Worldcom, 2008, and now) they rush to aggressively empower the federal government to intervene. And every time they make things worse than they were before. By definition. It’s not a Republican or Democrat thing, it’s a free market thing. Markets bring harmony, politicians and governments destabilize.
Some will surely respond that Trump and those around him are privy to information and threats that we’re not, thus their meddling, to which the only reasonable reply is “Please be serious.” Coronavirus was in the news for weeks without any market correction, only for global politicians to begin inserting themselves into the process. Cascading markets ensued. Well, of course. Indeed, especially if the virus’s spread represents a huge global health challenge, that’s the surest reason to keep information-deficient governments out of the solution. A Republican administration led by Trump should be making a global case for the rule of the marketplace over the rule of fallible politicians.
The above truth is something Republicans articulate well during the good times. Government is the problem, not the solution. “The scariest words in the English language are I’m from the government, and I’m here to help.” But when things get bad? Republicans seemingly forget all that they believe only to substitute their limited knowledge for that of the market. The results are predictable.
About all this, let’s be clear that no sane person presumes to know the full truth about Coronavirus. At the same time, the faintly reasonable among us understand that if central planning doesn’t work in good times, it most certainly doesn’t work in the bad. Too bad Republicans don’t grasp this basic truth when understanding it is most crucial. That they don’t means that history will rate their cool under pressure as rather sub-standard.
For now, let’s make no mistake about what’s happening: this is a political crisis that investors are putting a crashing market price on. Like all before it. The only insecurity is government.
This column first ran in RealClearMarkets