November 9, 2009

Imperfect Information Undermines “Free-market” Economies

Posted in economic recovery, media coverage, Obama administration, taxes, U.S. Economy tagged , , , , at 8:09 pm by realitytax

It’s no secret that a variety of interested parties exert influence over both economic policies and the general understanding (and reporting) of the effects of changes, just as they do in energy, health care, education, the financial sector, and/or anything else that the Congress or various federal agencies have a role in shaping. Misinformation can lead a seemingly honest, open debate far afield from reality, inhibiting the efficiency of the process while at the same time warping the outcome.

If you don’t understand fiduciary relationships, and you still think most corporate actions reflect the same sort of priorities that pertain when a truly small business is owned by a single person, or a couple, you’re missing a key factor. Shareholders, for instance, seldom have any significant influence on the pay (or bonuses) of officers engaged in potentially risky decisions at major corporations – auto manufacturers, for instance, or the financial institutions that crumbled on Wall Street as the financial crisis became obvious to virtually everybody at home and abroad near the end of the Bush administration, when we ended up dumping billions of dollars into banks without any obvious benefit (it certainly didn’t stimulate consumer lending, as both Bush and early Obama administration initiatives were intended to do.)

In fact, if you look closely, the problem of banks that are “too big to fail” is getting worse, not better, due to consolidation. But that’s not what they tell Congress or the media; the bankers speak instead of “economies of scale” to justify even further growth. Banks are tied to the model that’s ruled economic policy for decades: debt-fueled consumer spending.

Those who talk about concerns over finite resources, such as clean water, are scoffed at, and the countering rhetoric lumps them in with “climate alarmists” and “tree huggers” in such a way that genuine free market forces are not even close to determining the value of any natural resource that cannot be mined – with the curious exception that there are some cities who have privatized their formerly municipally controlled water systems, which does begin to result in a certain market value being placed on that particular resource. Of course, once a profit motive starts driving the price up, citizens in the U.S. and abroad often agitate to re-socialize their water supplies, in an era when “socializing” is used by some to imply everything that went wrong with every non-U.S. form of government.

Similarly there’s an obvious bias in the talk about income tax cuts – it generally originates from those who are well to do, and stirs the emotions of those who have much less, but more importantly if one looks closely at the data, there’s been a strong correlation in the past between those with wealth and those whose tax rates truly go down under most of the recent approaches. Would tax cuts stimulate the economy? Assuredly so – but in what way? A tax cut on income doesn’t have the same effect as, say, a tax cut (or tax credit/investment credit) for spending consistent with our national priorities, such as alternative energy sources, or research and education, etc. Such selective, targeted changes spur spending in specific areas — a very straightforward function of supply and demand, and the result is tangible — money flows to those areas, stimulating job growth and additional investment without any necessary growth of the government (growth which makes most of us justifiably cautious in the wake of the Bush administration’s under-reported increases.)

The reason that governments trying socialism, such as the USSR, to manage resources and markets for the good of the people have consistently floundered and failed is that they don’t — and can’t — have good enough centralized information to succeed making the rapid decisions necessary to control what is arguably the most intricate challenge of any “man-made” system, the decentralized activity of a vibrant, balanced economy. Markets are efficient at managing that information; but we’ve seen a dramatic example of why they cannot be expected to function for the good of the consumers when government fails to regulate those with the profit motives.

Consumers, too, need access to better information than they typically get under the current system, no matter if you’re considering tax-cuts, politics, the price of peanut butter, new home-buyer credits, or anything else. When misinformation is tolerated (or encouraged) it undermines the effectiveness of capitalism. Free markets rely on timely, accurate information – we need to consider new incentives for the reporting of “news” and information systems we base our choices on, or capitalism is absolutely doomed to implode.

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