The United States economy is rich both in physical and in human
capital. Within itself, it contains powerful restorative impulses capable
of moving through the trough of contraction into the next upturn of
the business cycle. In late 2008, the key obstacles to such restoration were the
financial crisis, the massive private and public debt overhang, and pessimistic
expectations. Since then, a wave of government interventions has introduced new
obstacles that may prove even more debilitating: political risk, and incentives for
rent-seeking. Unfortunately, plans seem to be underway to introduce still more
policies that impede market recovery.
Now is a particularly bad time to enact socialistic reforms to the market for
healthcare, pursue wealth-destructive cap and trade environmental programs, or
force additional federal tax dollars into state and local education markets. Such
policies imply higher government spending and, eventually, either higher taxes
or runaway inflation, thus depleting taxpayer and business confidence in the
economy and driving a further collapse in stock market value.
It is not too difficult to explain the stylized facts of the past decade in terms
of basic economic intuitions, such as scarcity, and that people respond to incen-
tives. In the late 1990s, government spending was restrained, and the economy
boomed. In the 2000s, government spending started rising and, since resourc-
es are scarce, private investment fell. With less private investment, economic
growth became less robust and created fewer jobs. Easy money from the Federal
Reserve, and capital inflows from abroad, buoyed the economy temporarily, fu-
eling a surge in debt and a housing price bubble in the process.
When house prices started to fall, mortgage debt went bad, bringing down
the financial industry with it. The burden of government grew, and the economy
paid the price. What is the solution? Shrink the government back to the size it
was in the 1990s. Yet this simple supply-side logic is being drowned out by old-
fashioned Keynesian demand-side stories that are scantily supported empirically
and theoretically flawed.
The policies we recommend (except to some extent on immigration) are so
opposed to anything that can realistically be expected from a government that
was elected with the help of the campaign contributions of organized labor,
organized environmental groups, organized healthcare workers, organized teach-
ers unions, organized farmers and poorly-performing businesses seeking govern-
ment contracts, that it may seem as quixotic to advocate them now as it was for
Adam Smith (1776) to attack the mercantilism that was the reigning misguided
philosophy of the late eighteenth century.
His comment (Smith 1782) that “There is a great deal of ruin in a nation”
captures his despairing awareness of the barriers his advocacy faced. Yet Smith
clung to reason, and, in the next few decades, his arguments transformed eco-
nomic policy in Britain. In the same way, we stand by reason, hoping that the
American people, and possibly even American political leaders, eventually will
see the light.
As Adam Smith might well have put it, had he thought it even remotely
possible for governments to grow to levels now common in the early twenty-first
century: capitalism succeeds and big government fails to raise the wealth of nations.
As formerly free market scholars such as Richard Posner (2009) peel away from
this judgment and run for the cover provided by big government, Remnants 7
such as we must ensure that the small candle of liberty continues to shine on
through the new Dark Age that threatens.
Like Adam Smith in 1776, we conclude this monograph on a note of tenta-
tive optimism for the future of laissez-faire capitalism in the United States. In
our judgment, the current recession is by no means as deep as President Obama
and his administration would have us believe. By exaggerating the seriousness
of the economic contraction, the President has opened up avenues for a full-
blooded pursuit of a much more far-ranging, left-leaning economic agenda than
the majority of Americans would normally endorse.
By so doing, he may well have overreached, just as President Lyndon John-
son overreached with his pursuit of war escalation in Vietnam and the Great
Society Program following his defeat of Senator Barry Goldwater in 1964. Lib-
eral overreach in the Great Society era ended the great post-Second World War
boom and caused over a decade of slowdown and stagnation, but eventually
paved the way for a generation of conservative dominance and strong economic
growth after the election of Ronald Reagan in 1980.
In normal times, a majority of Americans prefers laissez-faire capitalism to
the social market economy. The US economy is dynamic because a large ma-
jority of Americans like it that way. Even in times of boom, 15 per cent of
American jobs disappear each year. Their places are taken by new jobs created
by start-ups and expansions.
This dynamism continues even in the midst of the 2008-9 financial col-
lapse. As Starbucks and Neiman Marcus encounter problems, companies that
cater to a more frugal clientele, Burger King and Wal-Mart, expand and prosper.
That is the American way. A Pew poll released on May 21, 2009 found that 76
per cent of Americans still agree that the country’s strength is “mostly based on
the success of American business” and 90 per cent still admire people who “get
rich by working hard” (The Economist, May 30, 2009, 13).
As the consequences of the Obama government’s profligate deficit-spending
and interventionism become clear, and US voters face rising taxes, high interest
rates, and continuing below-trend economic growth, disillusionment inevitably
will set in, and may express itself politically as a reformed Republican Party re-
vival, or as a shift to the right by a reforming Democratic Party, as occurred to
some extent in the 1990s.
Western European economies, especially the bastion of state-dominated
capitalism, France, should serve as a cautionary tale of what awaits America in
the long run if such an awakening fails to occur. In France, the average rate of
unemployment rarely falls below 8 per cent, even at the peak of the business
cycle; and the average youth unemployment rate almost always exceeds 20 per
cent. In France, more than 20 per cent of all available jobs are provided through
government, and many of these are relatively poorly paid make-work, in the
form of cleaning the facades of public buildings, planting and weeding public-
gardens and the like. In France, more than 50 per cent of GDP is accounted for
by public spending. The rate of GDP growth in France lags permanently below
the average for OECD countries. (The Economist, May 9, 2009, 27-29).
The United States has enjoyed much greater success in the past quarter of a
century because its system is far more laissez-faire, and can anticipate similar suc-
cess in the future if the recent drift to state dominance is reversed. We anticipate
that a return to the kind of laissez-faire capitalism that evolved so successfully
throughout the last two decades of the twentieth century once again will enjoy
majority support in the not-too-far-distant future once the electorate begins to
suffer the severe economic downside of the Bush and the Obama administra-
tions’ anti-capitalist policies.
), but it's an interesting thought for sure.
