Beware: The Government Wants to Help

Millions of Americans have lost billions of dollars in recent weeks as the stock market bubble popped and corporate accounting fraud came to the forefront.

The media blame capitalism. In Congress, bipartisan majorities rush to pass more regulation in an effort to curb free action in the marketplace. Conservatives know that more government is not the answer. But there’s another important fact to remember here: with everything that’s gone wrong this year, we can rightly blame on the government.

Liberals have finally decided that they don’t hate everyone who invests in the stock market. Now investors are victims, and big brother is going to step in and protect these “victims” from the evil corporate executives.

This “protection” of investors and workers almost always takes the form of denying them the right to engage in certain consensual agreements. Government will make it harder for workers to find 401(k) plans by placing huge hurdles before the employers who would like to offer them. Rejecting one of Marx’s more sensible ideas, Ted Kennedy wants to limit the extent to which workers can own part of the company they work for.

But the reason there was a bubble is because people (including me) invested poorly. Under no coercion, workers put their money in bad securities and then got poor. This is one of the facts of a free market. It will take people losing their money before market players start playing more intelligently.

Bad investments hurt not only the folks who lose their cash, but also the well-structured companies who don’t get the investor cash. In the long run, investing in overvalued stocks makes everyone poorer except for a few day-traders and unscrupulous executives.

Why did so many people invest their cash poorly? Workers eager to save, but without the time to research individual firms, threw their money into mutual funds in IRA plans. The supply of investor cash created a huge demand for brokers and fund managers, and many of them probably weren’t very good.

So is this just a blip? A market failure? Maybe, but the government does not step out of this with its hands clean.

The tax code, corporate law, and general government efforts to “increase market efficiency” and “boost investor confidence” must bear a large portion of the blame for the bubble and its subsequent burst.

First is the problem I call “Colin’s bar.” The catcher on my baseball team is this short-tempered Irish guy named Colin Fitzpatrick. He plans to open a bar some day soon, and has already lined up investors. I’ve played baseball alongside this guy and seen him manage the Irish pub that sponsors our team. I would feel confident investing in his bar.

However, I only have so much money available for saving and I put it into a Roth IRA. I put it there because that way my earnings, if they existed, would be tax-free. If I wanted to buy Colin’s privately-sold stock, the government would take a portion of my earnings.

So here is another example of Uncle Sam sticking it to the little guy (Colin weighs about 150 pounds) and doing the bidding of the big guy — publicly-traded corporations. But this market distortion — taxing off-Wall Street earnings more than Wall Street earnings — leads inevitably to investors making less-educated decisions, which leads to bubbles.

We may like having tax breaks, but it is only the government’s confiscatory taxation of savings income that makes us need such havens as 401(k)s and IRAs.

Similarly, the entire purpose of the Securities and Exchange Commission was to create a system in which investors would be more confident. It seems to me we’ve all been far too confident.

The very existence of publicly-traded corporations, which exist as legal entities, is at the core of the Enron and WorldCom scandals. Corporate law makes an artificial system that creates an unnatural divorce of ownership and management. This means that the people who control the company are not those who stand to lose out big when everything comes crashing down.

The almost ironic thing is that all of these laws — IRAs, the SEC, incorporation law — were government efforts to promote commerce and business. These harmful government actions were not regulators trying to strangle business; they were regulators thinking they could make the market run more smoothly.

It took too much effort, in the regulators’ eyes, to invest wisely. It involved too much risk, the government felt, to start up a new company.

The lesson is a simple one: all government interference in the marketplace will do harm. It will do some good for someone, but it will likely harm the country on the whole, and especially the little Irish guy.

When the government looks you in the eye and says, “we’re here to help,” it’s time to be afraid.