Story of Two Economic Experiments: Intervention vs Non Intervention

Two economic experiments are underway: one with heavy government intervention another without.

July 29, 2024

By: Bobby Casey, Managing Director GWP

If you can’t be honest about identifying a problem, you stand no chance of fixing it.

Addicts are told this right? First step is admitting you have a problem.

I think the US is so addicted to debt, it can’t admit it even has a problem. And even when the stray politician says it, it’s more like a hungover promise you make to quit and never do it again after a long night of too much drinking.

No sooner will someone say, “This debt is untenable” that they turn around and say, “But we gotta still give billions to XYZ cause.”

So each side is volunteering the other side’s subsidies to be cut.

In the last four years two major experiments were rolled out.

The first was during the Pandemic in 2020 and shutting down the economy with heavy intervention. This was tried in many countries.

After four years, a few things can be observed:

The population to employment ratios are not even back to 2019 levels. Forget the unemployment numbers. If you just look at the population of people working, you can see that in 2019, 61.1% of people were working and now it’s 60.1%.

There are other factors that could prevent people from working again, but none of them will amount to barely eking up to pre-pandemic levels.

We’d mentioned in previous articles how media outlets are praising the boom in retail spending; while conveniently omitting the part where people aren’t buying MORE, they are simply spending more for the same or less.

The only way we can pretend like things are better than they are, is by including government numbers. So we’d need to rope in government activity: its spending, what is produced under its spending, etc. Then the US economy looks amazing! We just can’t look at the debt it took to do all that.

Inflation is a whole smoke and mirrors act. It presents as merciful and benevolent, but it winds up being a massive transfer of wealth to the “big club we aren’t in”, as George Carlin beautifully called it.

There are a LOT of economic takes on inflation. The most common is that it’s a silent tax, so by extension theft. But it’s theft of value, rather than theft of physical money. You can keep your $100. It’s just going to be worth $20 in a few years.

So when you’re planning your retirement and you think you need $100,000 per year to live the same lifestyle you’ve been living, and your money is debased, by the time you get to retirement, you’re going to need $500,000 to life as you did. There’s no way to plan for a future retirement if there’s not enough money in circulation to do so while you’re actually trying to save.

If you keep making $100,000 per year, and that money is debased. You go from being able to afford a relatively comfortable lifestyle, to wondering how you’re going to pay for groceries AND the electric bill.

This is the effect most folks know. They know that inflation cancelled any possible boon the stimulus could’ve given.

But inflation is monetized debt. And debt is the addiction. The spiral becomes more understandable when you get what is triggering all of this.

The TL;DR version is that once you bail out industries, banking or otherwise, you signal that they can’t fail. In fact, you signal that failure has monetary value.

The more expanded version is, if worthlessness and failure carry a higher price tag than value and productivity, what do you suppose will get more investment?

Banks are literally creating toxic assets, like that’s its job:

Banks, praxeologically speaking, perform the function of government contractors, producing the product “toxic financial asset.” … This demand ensures that banks continue to produce high-risk financial instruments. The financial sector profits from creating these products despite knowing they may become worthless. Ironically, it is their worthlessness that causes them to be valuable since that rationalizes the bailout.

If you get a bunch of money, and you can’t just hold on to it, you have to invest it in something, but you want to benefit off the initial influx before it is devalued, what would you do? Probably drop it into something that will give you the flash in the pan that you need: which tends to be tech stocks and real estate.

Productivity and value creation become relatively less valuable as the economy becomes optimized toward capturing inflation investments. This process distorts market signals, misallocates resources, and perpetuates an economic environment where success ties more to financial maneuvering than genuine productive output.

In an economy that rewards inflationary rent-seeking, creating value has become unwise, as it only earns low-profit-margin money from stingy spenders who had to work to earn it.

The financial institutions don’t have the same overhead as a factory. Instead, they are looking for a quick buck and a new toxic asset to sell back to the government… i.e. the taxpayers… at a profit margin that is astronomical.

This is why we don’t have flying cars right? Why invest in something people might want, when you can invest in some fleeting tech notion that doesn’t even have to succeed?

The second experiment came out of the pandemic. That is Argentina:

On day one in office, Sr. Milei abolished or consolidated half the federal ministries, laying off tens of thousands of government parasites in the process and promising more of the same in the days ahead. And just last month, in a major legislative victory, his so-called “Ley de Bases” and fiscal reform package was signed into law, paving the way for sweeping privatization across multiple key industries along with much needed labor market deregulation.

All the Keynesians are saying this is the end for Argentina, and yet…

So far, the case study is favoring non intervention. You can’t regulate recklessness out of a market that incentivizes it. The best regulation is the freedom to fail.