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The federal government is too economically influential, & why that's a problem (Part 1)

In recent years, the federal government has quietly become the most powerful economic force in the country. Fueled by record deficit spending, the US has poured trillions into direct stimulus programs, public projects, and corporate incentives in an effort to stabilize, modernize, and guide a vulnerable economy. If official data and messaging from the White House are to be believed, that mission has been accomplished.

Despite the unprecedented level of federal expenditure, inflation has slowed while unemployment remains low. Consumers are still spending strongly while investors cheer on a buoyant stock market supported by Big Tech’s strong earnings and AI potential. Economists are interpreting this data as an encouraging sign that a pillow-soft landing is not only possible but likely for the economy.

Except, like most official statistics and all politicians, these initial impressions are extremely deceptive and should be regarded with strong skepticism.

Yes, inflation has cooled off compared to its peak. Even still, it remains substantially higher than the Federal Reserve’s 2% target and surprised with a hotter print than expected in August. Accounting for the multiple consecutive downward revisions, quietly made to labor statistics after the fact, labor conditions are much weaker than previously believed.

It is clear that the mission has not been accomplished. The Biden administration has been subject to escalating criticism from the press and plummeting sentiment in the polls. Critics of the president’s economic vision rightfully focus on its results and not its intentions; however, they do not go far enough: the very nature of the government’s economic influence must be called into question as well.

The truth is, the federal government is not and has never been an effective or efficient allocator of capital. And why would it be? Its incentives are fundamentally misaligned with the interests of taxpayers. Its actions are based on politics and the appearance of progress, not value creation and fiscal prudence.

There are countless examples of Washington's failed economic stewardship and waste. Congress and the Fed provided banks with tens of trillions in taxpayer-funded bailouts and secret loans; yet, the banking industry appears to be in no better shape since then, given its panicked usage of the Fed’s emergency loan facilities in 2019 and the regional bank implosion this past summer.

According to a Forbes article published in August of this year, the Obama administration lent hundreds of millions of dollars to renewable energy companies that ultimately went bankrupt due to mismanagement or fraud. A decade later, the Biden administration seems determined to repeat those mistakes by doling out generous incentives to an EV industry that has already weathered multiple bankruptcies in just the past year alone.

Suffice to say, the several examples mentioned above are enough to paint a wholly unflattering picture of Washington's investment prowess. In the next article, we will examine how Washington’s economic interventionism distorts natural capitalistic incentives, harms consumers, and hinders economic growth.

Disclaimer: This article is in two parts. The second part will be soon released.


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