Out of the frying pan and into the fire?
Regardless of what you think about the Laffer Curve (the supply-side economic theory that lower rates actually generate higher government tax revenue because they encourage investment and provide an incentive to work hard), Art Laffer makes two very valid points in his recent WSJ Op-Ed piece.
The Age of Prosperity Is Over
The first point is about the lack of accountability and the moral hazard that a lot of the recent government intervention has caused. I could not agree more with Laffer when he says "Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses."
Part of me fears that the lack of accountability for those who caused the problems will make it significantly more likely that we will find ourselves in a similar situation again in the future. Also, part of me just wants pure revenge upon the scumbags like Angelo Mozilo or the former heads of Fannie and Freddie and morons like Chris Cox and Phil Gramm. Anyone who played a part in creating the current financial crisis should lose their job and have any money that they made while this mess was created taken away. Will this happen? Of course not.
The second point from the article that I completely agree with is that we are going to see huge unintended consequences as a result of such massive government intervention. Here's what Laffer has to say on the subject:
"But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.
If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.
Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.
The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.
But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it."
Laffer goes on to talk about how almost every quickly implemented government knee-jerk reaction in the past has had terrible consequences, mentioning things from Nixon's wage and price controls, end of the gold standard, import surcharges to Carter's wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.
Now I certainly don't agree with everything that Laffer has to say, especially his praise for Alan Greenspan. Also, as much as I would like it if tax cuts really raised government revenue...I highly doubt that they do. I don't necessarily agree that "The Age of Prosperity is Over" either.
However, like him I suspect that we may be jumping out of the frying pan and into the fire with all of the government intervention. What will the unintended consequences of the bailout? It's tough to say at this point. Hyperinflation? The eventual collapse of the U.S. dollar? No one knows for certain. What I do know is that if the government can screw something up, it usually will...and with the amount of money being thrown around here this time the screw up is going to be big.
I still think that a lot of money can be made in the stock market over the next several years, the key will be to figure out what the intended consequences of this government intervention are and how to profit from them.