The Unvarnished Truth About Government (Ludwig von Mises Institute, 2012) 1,209 views
August 8, 2013
In government, failure is success. That’s what I call DiLorenzo’s First Law of Government. When the welfare state bureaucracy fails to reduce poverty, it is rewarded with more tax dollars and more responsibilities. When the government schools fail to educate children, they are rewarded with more tax dollars and more power to meddle in education. When NASA blows up a space shuttle, it is rewarded with a large budget increase (unlike a private airline which would probably go bankrupt). And when the Fed caused the worst depression since the Great Depression in 2007, it was rewarded with a vast expansion of its powers.
DiLorenzo’s Second Law of Government is that politicians will rarely, if ever, assume responsibility for any of the problems that they cause with bad policies. No one group in society is more irresponsible than politicians. There are a few exceptions, but in general they will always blame capitalism for our economic problems even when capitalism is not even the economic system that we live under (economic fascism or crony capitalism would be more accurate). Nothing is more irresponsible than knowingly destroying what’s left of our engine of economic growth with more and more governmental central planning, even if it is given the laughable name of “public interest regulation.”
DiLorenzo’s Third Law of Government is that, with few exceptions, politicians are habitual liars. The so-called “watchdog media” is more appropriately labeled the “lapdog media,” for pointing out the lies of politicians is the best way to end one’s career as a journalist. Do this, and your sources of information will cut you off.
One of the biggest governmental lies is that financial markets are unregulated and in dire need of more central planning by government. Laissez-faire is said to have caused the “Great Recession.” Fed bureaucrats have lobbied for some kind of Super Regulatory Authority to supposedly remedy this problem. This is all a lie because according to one of the Fed’s own publications (“The Federal Reserve System: Purposes and Functions”), the Fed already has “supervisory and regulatory authority” over the following partial list of activities: bank holding companies, state-chartered banks, foreign branches of member banks, edge and agreement corporations, U.S. state-licensed bank branches, agencies and representative offices of foreign banks, nonbanking activities of foreign banks, national banks, savings banks, nonbank subsidiaries of bank holding companies, thrift holding companies, financial reporting procedures of banks, accounting policies of banks, business “continuity” in case of economic emergencies, consumer protection laws, securities dealings of banks, information technology used by banks, foreign investment by banks, foreign lending by banks, branch banking, bank mergers and acquisitions, who may own a bank, capital “adequacy standards,” extensions of credit for the purchase of securities, equal opportunity lending, mortgage disclosure information, reserve requirements, electronic funds transfers, interbank liabilities, Community Reinvestment Act sub-prime lending “demands,” all international banking operations, consumer leasing, privacy of consumer financial information, payments on demand deposits, “fair credit” reporting, transactions between member banks and their affiliates, truth in lending, and truth in savings.
In addition, the Fed also engages in legalized price fixing of interest rates and creates price inflation and boom-and-bust cycles with its “open market operations.” In addition, financial markets are just as heavily regulated by the Securities and Exchange Commission, Comptroller of the Currency, Office of Thrift Supervision, and dozens of state government regulatory agencies. All of this is the Washington, D.C. definition of “laissez-faire” in financial markets.
DiLorenzo’s Fourth Law of Government is that politicians will only take the advice of their legions of academic advisors if the advice promises to increase the state’s power, wealth, and influence even if the politicians know that the advice is bad for the rest of society. The academics happily play along with this corrupt game because it also increases their notoriety and wealth. A glaring example of this phenomenon is the fact that, in the aftermath of the onset of the “Great Recession” there was almost no discussion at all by government officials, the media, or op-ed writers about the vast literature of economics that documents the gross failures of government regulation over the past century to promote “the public interest.”
There has always been some kind of government regulation of economic activity in America, but the federal regulatory state got its first big boost with an 1877 Supreme Court case known as Munn v. Illinois. The two Munn brothers owned a grain storage business and the powerful farm lobby in their state wanted to essentially steal their property by having the state legislature impose price ceilings on grain storage. Such laws had previously been ruled unconstitutional as a violation of the Contract Clause of the U.S. Constitution. But the plunder-seeking farmers prevailed, and it was hailed by statists everywhere as a victory for “the public interest.” Thus, the very first major example of “public interest regulation” was unequivocally an act of legal plunder that benefited a very narrow special interest at the expense of the public, which would have benefited more from a free market.
Either because of ignorance or corruption (or both), the statist academics of the time sang the “public interest” tune with regards to regulation, creating the myth that markets always “fail” and that the remedy is benevolent and wise government regulation in the public interest. The academics did this despite the fact that there was glaring evidence all around them that regulation was always and everywhere a special-interest phenomenon, as indeed almost all governmental activity is.
As historian Gabriel Kolko wrote in his 1963 book, The Triumph of Conservatism, big business in the early twentieth century sought government regulation because the regulation “was invariably controlled by leaders of the regulated industry, and directed toward ends they deemed acceptable or desirable.” Government regulation has generally served to further the very economic interests that are being regulated. Chicago School economists labeled this phenomenon the “capture theory of regulation.”
Most academic economists, seduced by the prestige, employment, and money that came from being governmental advisors, ignored all of this reality and instead spent roughly fifty years—from the pre-World War I years to the 1960s—inventing myriad factually empty theories of “market failure.” A popular book at the time was entitled Anatomy of Market Failure, by Francis Bator. This literature was (and is) based on the fraudulent technique of comparing real-world markets to an unobtainable, theoretical, Utopian ideal (“perfect competition”) and then condemning the real world for being “imperfect,” all the while assuming that the politics of government regulation would perfectly “correct” these imperfections. Economist Harold Demsetz labeled this charade “the Nirvana Fallacy.” Comparing real-world markets to “Nirvana” will always cause one to conclude that markets are “imperfect” by comparison. The market failure theorists never once compared government to Nirvana to subject interventionism to the same criteria. The Austrian School of economics is the only school of thought within the economics profession that never participated in this farce.
To its credit, the Chicago School of economics joined with the Austrians in exposing many of the market failure/regulation—is-always-good fallacies. Hundreds of journal articles and books were published that rediscovered the old truth that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit,” as Nobel laureate George Stigler wrote in 1971.
This kind of research was expanded over the years to show that large corporations often support and lobby for onerous government “safety” and environmental regulations because they understand that the regulations will be so costly to enforce that they will likely bankrupt their smaller competitors while deterring others from entering the market in the first place. Businesses long ago discovered that the only way to have a long-lasting cartel is to have the cartel agreement enforced by the government. Privately-enforced cartels always break down because of cheating by the cartel members. The railroad and trucking industries were cartelized by the federal Interstate Commerce Commission (ICC) for many decades, for example. The ICC set monopolistic prices in these industries and prohibited genuine competition. The Civil Aeronautics Board (CAB) cartelized the airline industry by prohibiting price competition until it was deregulated in the late 1970s. There was vigorous competition in the electric power industry in the U.S. until it was ended by government regulation in the early twentieth century by the creation of monopoly franchises by state and local governments. AT&T enjoyed a government-sanctioned monopoly for many decades as well.
During the period of history when government-sanctioned monopoly was increasingly the norm, the Fed was created to facilitate the creation of a banking industry cartel. As Murray Rothbard wrote in A History of Money and Banking in the United States,
the financial elites of this country … were responsible for putting through the Federal Reserve System, as a govemmentally created and sanctioned cartel device to enable the nation’s banks to inflate the money supply … without suffering quick retribution from depositors or note holders demanding cash.
In other words, giving the Fed more regulatory authority is not unlike giving an alcoholic another bottle of whisky, a murderer another gun, or a bank robber a ski mask. It is bound to make things worse, not better.