Wednesday, March 25, 2009

Government Failure: On the Way to Hell

I was born in Brazil, so I fully understand what the current President of the European Union, Mirek Topolanek, meant when he said (not very diplomatically) that the administration’s fiscal package and financial bailout "will undermine the stability of the global financial market" and will send the US on a "way to hell."

Maybe we needed an European from a country wrecked by socialism to make us see that the the emperor has no clothes. Despite the administration's insistence on misrepresenting the economics profession, many economists have denounced the lack of soundness of a plan that is at best a cartoonish application of outdated economic theories, possibly driven by less-than-noble politics.

The road to hell is paved with good (and sometimes bad) intentions. The AIG fiasco continues to burn: the resignation letter of Jake DeSantis to Edward M. Liddy is an excellent example of how government micromanagement (or should we say micro-mismanagement?) of the economy is a recipe for economic disaster (HT Mankiw, see also Division of Labour). I couldn't care less about corporate intrigue, however, this one is being supported by the taxpayer!

The government has botched up badly by keeping this company afloat, and the more it tries to replace markets and free enterprise with overblown politics, the faster we'll go down that old hot road. I just hope we make a U-turn before reaching terminus station.

PS: Megan McArdle's post and the commentaries that follow reveal how easily corporate governance can be messed up by government micro-mismanagement.

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