Tuesday, February 24, 2009

Cautionary Tale

One key element of intellectual conservatism is understanding the limits that humans have in controlling economic and social phenomena. History is fraught with examples of disasters caused by movements who thought that they could arbitrarily force human beings and social phenomena to conform to their abstract visions. The most dramatic example is seen in socialism, in which leaders pushed for the creation of a "new man" and "new economy" organized around their collectivist vision. Of course the inevitable result was famines, scarcity and gulags.

"Progressive" dogmas are rarely totalitarian, but most are based on the implicit belief that social and economic phenomena can be regulated to arbitrarily conform their visions of "social justice" without costly unintended consequences.

Before my "progressive" readers strike out at strawmen; I will unequivocally state that I am not against all regulation and all state intervention in the economy. I simply urge my readers to consider that each government "cure" is accompanied by a whole new set of economic and social "diseases" that prompt even more government intervention.

A brief glimpse of government intervention in the housing market demonstrates this:

1. To obtain the benefit of increased home ownership the government heavily intervened in the economy through Fannie Mae, Freddie Mac, tax write-offs and programs and policies geared specifically towards "underrepresented populations."

2. In addition the government encouraged loose credit by maintaining the prime interest rate at levels that were below inflation.

3. These actions obtained the intended benefit of expanded home ownership.

4. One of the unintended consequence of increasing the demand for housing was higher housing prices, i.e "unaffordable housing" which limited access to the housing market.

5. The government took advantage of rising home prices by dramatically raising property taxes, which made housing even less "affordable" for many Americans.

6. To counter the problem of "affordable housing" and expand housing among "underrepresented populations," the state encouraged the expansion of housing subsidies in general and government backed sub-prime mortgages in particular.

7. This greatly contributed to the dire financial situation of several banks.

8. Which of course prompted an extensive and very costly intervention in the financial sector, which will have a multitude of unintended consequences, among them an increase in the size of the national debt.

9. This will inevitably lead to higher inflation and / or much higher interest rates.

10. And of course the state will enact a whole new set of programs and policies to address the economic problems created by state intervention and so on and so on...

So, at the end of the day the housing market and most of the economy would have been in much better shape if we had exercised greater caution in our efforts to bend the market to our desires. The fundamental problems are that few voters can connect the economic problems of today with the policies of the past. And even fewer politicians are willing to take responsibility for the economic disasters that they created; it's always easier to "blame the market."

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