Liddick: Government’s ill effects on markets

by Morgan Liddick

Quick, what are the most important macroeconomic factors influencing today’s economy? Greek debt and concerns over Eurozone stability? Slowdowns of the Chinese and Indian economies? Uncertainty over health care costs and regulation? Fed policy?

Boys and girls, we no longer have to worry about a left-of-center president and his political party creating a statist economy. We already have one.

Recent studies from Stanford University and UBS bank indicate what many have suspected: It’s no longer about productivity gains, balance sheets, P/E ratios, balances of trade or the costs of capital, labor and materials – the traditional and proven measures of an open economy. It’s about governments and the policies they implement. And contrary to the assertions of statists, this creates more uncertainty and instability, not less. Since 1985, more than half the daily market swings of 2.5 percent or more have been generated by uncertainty over government policies. Since 2007, almost all of them have been. Ten of the biggest 20 daily market upswings and 11 of the largest 20 drops since then have occurred in the last three years. According to Andrew Lo, professor of finance at the M.I.T. Sloan School of Management, “The last few years have been the most volatile for all of recorded history.”

To understand why, consider that markets abhor uncertainty – and that we have chained our economy to that most uncertain of beasts, politics. What will health care costs be if Obamacare remains the law? What will happen if the EEOC adds illegal aliens to its list of “protected classes” by presidential fiat? If the National Labor Relations Board decides that a company cannot relocate, or close an unproductive facility if union labor will be adversely affected? If energy costs treble because Steven Chu decides the national economy would be better off fueled by windmills and solar panels? One of the above has already happened, and the others are at least plausible, given the past three years.

How will markets react if those who create the wealth necessary for a tax base continue to be threatened with dramatically higher taxation? In January of 2013 we are staring at a quadruple-whammy: automatic increases in the basic tax rate, the capital-gains and dividend rates and a 2 percent rise in Social Security taxes. Plus possible widening of the Alternative Minimum Tax to include 20 percent of all wage earners, absent “adjustments” to account for inflation. If there is no action from the projected lame-duck Congress, what will be the incentive to continue to grow wealth, assuming that the bulk of any increase will be siphoned off to fund the wants of others? Remember, the welfare state now consumes more than 60 percent of the Federal budget in payments to individuals, according to the Office of Management and Budget.

Then there’s the joker in the deck: What happens if the current administration, with its bias against those productive Americans who have done well, is returned to office in November? Since it has shown little reticence in whipping up the mob to a pitchforks-and-torches frenzy while the vagaries of a re-election campaign hovered over it, what will it do if restraint is removed? At the very least, we can expect much larger and more direct interventions in the market, as statists like the president and his unofficial economic advisor Paul Krugman crank up the rhetoric, the borrowing and the taxation. Expect more attacks on the “fat cats,” more Solyndras, more “pet corporations,” more debt and more blame. Much more blame – for everyone but the person the president sees when shaving. Expect continuing mediocre economic performance instead of what should by now be a roaring recovery.

If one understands but a single thing about market economies, it should be that they are marvels of efficient resource allocation. This allows them to be the most powerful engines of development and wealth production ever seen, easily outstripping any competing model. History, particularly the history of the 19th and 20th centuries, is explicit about this: The world is littered with the wreckage of competing systems. And it will continue to be, despite all assurances that “it will be different this time,” because those involved in today’s market manipulations are smarter, purer of motive or better-equipped than they who perpetrated the frauds and failures of the past. It won’t be different, because they aren’t.

Or, as Lawrence Kudlow, the Chief Economist for Schroder and Company said in 2000 in what seems a prescient description of the crash of 2007 and the anemic recovery thereafter, “If the government would keep its cotton-pickin’ mitts off the economy, then market valuations will be successfully priced by well informed investors…” and prosperity will result.

Alas, Pennsylvania Avenue thinks it knows better. We shall see …

Summit County resident Morgan Liddick pens a Tuesday column. E-mail him at

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