There are certain rules of law that fall within the purview of man and there are significantly more important truisms of markets that defy the laws of man. Whenever man attempts to interfere with these truisms, chaos ensues. In just 100 days, Barack Obama has managed to violate many free market principles which guide our economy. The stage is being set for ever more volatile economic dislocations in the years ahead.
The tea parties of the past few weeks dramatize the substantial differences between the thought processes of those who think they are in control (our government) and those that are affected by the principles of free markets.
In my experiences as a CPA and assisting companies in financial distress, I have noticed a series of truisms that have been continuously violated by governments in their feeble attempts to control economic performance. These principles are based upon my observations of the self interests of mankind which influence the performance of free markets.
The first principle is "Governments can never react as quickly as free markets". Despite efforts by government to react, the reactions are just what the name implies – a reaction. Free markets, however, can be proactive. Governments solve yesterday’s problems with yesteryear’s solutions thereby setting the stage for tomorrow’s crisis.
In reality, politicians should proclaim during their campaigns to "solve problems that they created with solutions which will be significantly worse than the problem that they are attempting to solve". I would love to see that on a bumper sticker!
The second truism is "Free Markets will always win". I was in Haiti in the early 1990’s and was amazed at how quickly an "uneducated" person will adapt and overcome a ridiculous embargo that we imposed on Haiti. The concept of a black market is deliberately designed to circumvent the rules that government’s put into place to begin with.
Our government’s attempt at Prohibition is perhaps another example of this second truism. After much fanfare, all Prohibition managed to do was organize crime in this country. The real issue, alcoholism, was barely impacted at all.
The third rule of free markets is "You cannot tax your way to prosperity". Taxes are an expense to individuals, corporations, and the public. If your taxes are too high, capital will flee your markets, investment will slow, and economic problems will follow.
The fourth truism is that a Nation’s tax rate operates in inverse relationship to its productivity. Increase taxes and your productivity rates will generally decline. Decrease tax rates and productivity will generally increase. The role of self-interest is paramount to any economy. Self interest will almost always trump government rules and regulations. People will, by nature, find a way around laws.
A fifth principle which is currently being played out with the banking crisis is "Governments always overreact and under perform". By the time, the spending for TARP, the Stimulus and the budget is complete, the crisis will have been over for 18 months and the next round of inflation (read crisis) will take place with solutions which will be too little and too late.
A sixth truism is so important to our Nation at this very moment. "Remove negative consequences and personal accountability and a Nation will get more of the same". These bailouts are a disaster in the making.
Finally, the last principle is one that I hope all will consider very carefully. That principle is "Nations can fail". In my travels to Poland, Romania, Slovenia, Bulgaria and other nations of the world, the dangers of believing that the U. S. is too big to fail is a serious error in judgment. The failure would be of our making but it certainly would not be our decision. In just a few short years, China, by holding a major portion of our national debt and being a major source of our borrowings, will be in control of our fate.
With the principles that I have observed it is obvious to me why our Founding Fathers wrote the Constitution the way they did. I would encourage all citizens to read our Constitution very carefully. Our Founding Fathers understood the role of government. Governments should provide for common defense, the framework for commerce and provide for the rule of law. Nothing more and nothing less.
Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics and corporate governance for National and State CPA Associations. He is on the boards of numerous non-profit and publicly traded companies. He can be reached at [email protected]