Yesterday’s FT article by Gary Becker and Kevin Murphy titled, “Do not let the ‘cure’ destroy capitalism” is worth reading. In it they highlight three basic flaws with the current approach to the crisis. They are

a) an overly broad diagnosis of the problem,
b) a misconception that market failures are readily overcome by government solutions, and
c) a failure to focus on the long-run costs of current actions.

The problem is also a problem of democracy. Governments are intervening in part because its constituents want someone to solve the problem quickly. And no entity can do so much so quickly than government. This would occur regardless of which party were in power. Democratic representation will always call upon politicians to “do something” to solve distress in the market. And both parties could be expected to react in similar ways. I have little doubt that if Republicans were in power we would still have a TARP (oh right, that happened when Republicans were in power!) , we would still have a fiscal stimulus plan, and we would still have some assistance to Chrysler and GM. Perhaps the degree of intervention would be different, but Republicans would still have taken similar actions.

In the far future, the only way to prevent politicians from doing too much (and thus forcing them to do no harm) under similar circumstances will be to tie their hands in some way. There are two ways to do that. One way is via commitments to international agreements. For example, the world might be able to prevent a free fall into rampant protectionism, IF, countries abide by their WTO commitments. This is a big if (hence the capitals). A second method is with constitutional restraints. As an example state balanced budget amendments prevent states from becoming overly reckless in their spending. A similar requirement does not hold for the federal government though, and thus the US is destined to run deficits in the trillions of dollars for at least several years in the future.

My utopian vision for the future is a world in which politicans are ignored by the press and the people because everyone recognizes that they have very little ability to affect outcomes in their lives. It’s a pipe dream, I know!