I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.- Thomas Jefferson.

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Thursday, September 2, 2010

Regulation to Nowhere

By Vedran Vuk

China has some serious economic issues, but many are pointing to the wrong problems. A common culprit is the vast government spending that has created empty cities such as Ordos on the Mongolian border.

At first, the reckless spending on the empty city seems like the apex of government waste. But in a way, this isn’t so bad. In fact, it is a lesser evil as far as government expenditure goes. The United States has had similar projects on a smaller scale, such as the Alaskan bridge to nowhere.

Though many were outraged by the bridge, the spending could have been worse. Think about it this way. The bridge to nowhere would have cost nearly $250 million. The result would have been a redistribution of funds to a select few Alaskans and a useless bridge. Sure, it’s a waste. But suppose that instead, the government gave an additional $250 million to the Environmental Protection Agency or to the Internal Revenue Service to hire more employees.

With a bunch of new environmental busy-bodies to concoct and enforce regulations, we’d certainly be worse off. They would spend their time harassing and intimidating mines, power companies, and other productive industries. As a result, it would become more difficult to operate these important businesses. With more restrictions and obstacles, jobs are lost and costs increase.

The same goes for the IRS. What’s worse for the economy – a bridge to nowhere or a thousand new tax agents?

While the bridge to nowhere received loads of attention, few camera crews are present for the most wasteful funding marked for regulatory bureaucracies. Government intervention and regulation are the real problems in the economy. If everyone in D.C. was paid $150K a year to dig a ditch the size of North Dakota, we’d be all better off. Their giant ditch would be a complete waste. But they would be away from their usual schemes and regulations. In a sense, the bridges to nowhere and the empty Chinese cities keep the stupids occupied.

Even today, our primary problem isn’t necessarily the stimulus spending. In fact, one could argue that the stimulus has had little to no effect. It’s the Federal Reserve’s intervention in the economy that caused the crisis and has acted to prolong it as well. Also, the new financial regulations threaten the competitiveness of America’s financial sector. Despite our problems, people around the world still entrust their savings and finances to New York City. Any threats to this status quo destabilize the whole economy. Furthermore, stricter derivatives regulations could negatively affect businesses from Coca Cola to Morgan Stanley. Excessive expenditure is waste. But regulation is economic destruction.

The same goes for China. The main problems are not the empty cities. The extreme monetary manipulation by the central bank is the biggest threat of all. With a vast increase in loans and the money supply, China has spawned another real estate bubble sure to pop at some point.

The main problems during the Great Depression were also intervention and regulation. Yes, our spending today could match FDR’s, but the regulations still don’t. During the New Deal, nearly every profession had wage controls. Price controls covered many industries. During the war, rationing further hampered the economy. Crops and animals were burned and slaughtered to manipulate agricultural prices. Tariffs stifled world trade. Anti-trust laws bullied the most productive companies. A businessman could not start almost any project without first gaining the approval of bureaucrats. The damage caused by spending on make-work projects was nothing compared to the economic devastation caused by these policies.

Are there better places to put money than a bridge to nowhere? Of course, but there are far worse places as well. If money has to be spent, I’d rather it go toward a bridge to nowhere or an empty city than straight into a regulatory agency.

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