|
Clayton Homes, a home construction and lending business owned by Warren Buffett,
is a good example of a company suffering from government “stimulus” spending.
Due to its high lending standards, Clayton Homes has a good balance sheet. The
business has not needed any government assistance to survive. However, Clayton
Homes is now facing a formidable competitor: the government. As Buffett told his
investors, Clayton’s competitors that had engaged in risky loans are now
benefiting from extended loan guarantees from the government:
Though Berkshire’s credit rating is pristine – we are one
of only seven AAA companies in the country – our cost of borrowing is now
far higher than competitors with shaky balance sheets but government backing.(3)
Similar reasoning applies to the bailout of the auto
manufacturers. By subsidizing North American manufacturers, the Canadian and
American governments ended up giving money to companies whose products were not
competitive and provided such companies with an unfair advantage vis-à-vis their
competitors. Additionally, the bailout will likely have the effect of hurting
the “Big Three” in the long run because they will have no incentive to undertake
a much needed restructuring of their assets and business, allowing them to
reemerge as profitable businesses. The American auto industry should have
followed the example set by the steel industry when it allowed unproductive and
inefficient mills to shut down. Unfortunately, due to the extensive government
involvement in the auto industry, such a rationalization of business activities
might never occur.
Aside from moral hazard, government intervention has negative long-term effects
for taxpayers. Despite the fact that stimulus spending may improve the economy
in the short run, it will contribute to ballooning deficits that will have to be
paid for by future generations. As Alan Reynolds, senior fellow at the Cato
Institute, pointed out:
That so-called stimulus bill was, of course, a $787
billion deferred tax increase, plus interest. Although investors could not
be sure when the tax bill would be presented, Obama warned us that the first
installment would come from higher tax rates on dividends, capital gains,
stock options and the profits from foreign affiliates of multinational
corporations.(4)
|
Another New Deal Is Not the Solution |
In her groundbreaking revisionist book about the New Deal, The Forgotten Man(5),
Amity Shlaes contends that government spending did not contribute to ending the
Great Depression. Instead, it was the lack of faith in the market demonstrated
by Presidents Hoover and Roosevelt that was responsible for extending economic
malaise. Indeed, the “bold, persistent experimentation” favoured by President
Roosevelt led to dramatic destructions of wealth, the cartelization of many
industries, and high unemployment.
Shlaes’ conclusions provide support to those who contend that economies cannot
be fixed by massive government spending programs that rescue inefficient
corporations and create significant deficits to be paid off by future
generations. Rather, the most effective way to fix an economy during an economic
crisis is to cut government spending and cut taxes in order to increase
competitiveness and strengthen the foundations of a prosperous and
entrepreneurial society.
|
Policies promoting homeownership in the United States go back
to 1977 when the Carter administration adopted the Community Reinvestment Act
to reduce discriminatory lending practices in lower-income neighbourhoods.
This legislation forced banks to provide risky mortgage loans to un-creditworthy
borrowers and gave community groups the right to protest against banks’ non-compliance
with the law, possibly hindering business plans for mergers and expansion. In
1992, the Clinton administration adopted legislation requiring Fanny Mae and
Freddy Mac, the two government enterprises that purchase and securitize
mortgages, to devote a percentage of their lending to support affordable housing.
