Friday, October 31, 2008

The virtue of doing nothing

Earlier this week I wrote that "If government wants to assist this process [of economic regeneration], it can best do so by getting out of the way. Russell Roberts explains this line of thinking in more detail in today's Wall Street Journal:
They need to let housing prices fall. They need to let firms go bankrupt. They need to let firms that are healthy thrive. They need to let healthy firms buy the sick firms. It is time to let the imprudent fail and the prudent pick up the bargains.

...By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.

...Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.
Amen. This is why all the talk about how the candidates are going to fix the economy terrifies me, particularly from Obama given the perception he has cultivated of being a savior.

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