Leave it alone

by Russ Roberts on February 14, 2007

in Regulation

Brian Wesbury in today’s WSJ makes the case for leaving the economy more or less alone:

It’s the best of times. It’s the scariest of times. Last year, U.S.
exports, industrial production, real hourly compensation, corporate
profits, federal tax revenues, retail sales, GDP, productivity, the
number of people with jobs, the number of students in college, airline
passenger traffic and the Dow Jones Industrial Average all hit record
levels. For the third consecutive year, global growth was strong,
continuing to lift (and hold) millions of people out of poverty. From
30,000 feet, heck from 1,000 feet, it sure looks like the best of times.

And here’s his summary of why to be skeptical of intervention, particularly in what is sometimes called "industrial policy":

The cost of government intervention is always
underestimated in the midst of political battles, while the benefits
are always overestimated. Impeding the free market alters the course of
economic activity in ways that cannot fully be understood in advance.
For example, tax subsidies for using existing solar technology diminish
incentives for research and development, just like welfare payments
undermine the willingness of many recipients to work or go to school.
Why give up a sure thing for a future that is uncertain?

The U.S. is subsidizing ethanol, which pulls billions
of dollars of investment capital away from other areas of the economy.
When government picks what it thinks should be the winner, it saps
resources from other ideas and potential advancements. In the 1960s,
the U.K. picked coal and steel, while Japan picked consumer
electronics, motor vehicles and exports. The U.K. was wrong. The
Japanese got it right. But the odds of any government picking the right
strategy, industry or technology are no greater than that of a single
company or individual.

The power of a free market is that the odds of success
are increased. With tens, or hundreds, of thousands of different
entities researching, inventing, producing and distributing, successes
not only multiply, but their profits generate resources that allow the
economy to absorb the cost of mistakes and failure. It’s called
diversification. When one company fails, those closely involved are
hurt, but not the entire economy. When government is wrong, millions
suffer.

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