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Governments have stepped in

But will they step back?
There is an inescapable irony in the state saving the free market. Image: Reuters/Dado Ruvic/Illustration

In an economic crisis like the one the world is facing now, a lot of lines get blurred. One of the most obvious, and most significant, is the role of governments in the economy.

Proponents of the free market would usually argue that governments should involve themselves as little as possible. Their role should be to create an enabling environment for business and then get out of the way.

However, these rules tend to be disregarded when economies face the kind of disruption they are at the moment.

Over the line

“Most governments don’t necessarily want to meddle too much in the free market,” says Brett Hamilton, visiting lecturer in corporate finance at the University of Stellenbosch Business School and director of First River Capital. “However, what we have seen with lockdowns is that governments have over-stepped some of their own self-imposed boundaries.”

Firstly, this is through the lockdowns themselves. It is an extreme imposition on the part of governments, with enormous consequences, to stop many businesses from operating altogether.

And, secondly, authorities have acted through massive stimulus packages that are explicitly targeted at keeping banks and businesses afloat.

“In crises like these, the state is there to play an expanded and essential role to protect people and organise some sort of response,” says Sanisha Packirisamy, economist at Momentum Investments. “That is what we are seeing playing out now.

“There is this power shift occurring from the private sector into government hands that is challenging laissez-faire ‘leave it alone’ type practices,” she adds.

“Central banks like the US Fed [Federal Reserve] and the European Central Bank are saying that they will do everything they can to prop up markets,” Packirisamy points out. “Governments are talking about rescuing entire industries like airlines, hotels, and cruise liners that have been quite heavily impacted.”

Be careful what you wish for

The scale of these government interventions is already far greater than the money that was made available through stimulus packages during the great financial crisis between 2007 and 2010. The G20 alone has pledged to spend $5 trillion. The $2 trillion being spent in the US is 11% of that country’s GDP.

Few people would argue that these efforts shouldn’t be happening. After all, the US Fed’s decision to allow so many banks to fail in the early 1930s is widely regarded as the biggest policy mistake of the Great Depression.

However, that doesn’t mean they should go unchecked.

“What we’ve seen in crisis after crisis is that there is a reluctance by the state to roll back on its involvement and expenditure,” Hamilton points out. “Individuals and businesses also begin to expect that governments will continue to play a certain role.”

Learning from history

Two notable examples bear this out.

In 1917 Canada introduced personal income tax as a measure to fund its war effort. It was explicitly subject to review once the war was over. Canadians were, however, still taxed under the Income Tax War Act until 1948, when it was finally recognised that this was no longer a temporary arrangement, and the Income Tax Act was enacted.

The second example is more recent. The quantitative easing that was adopted by major central banks in the great financial crisis in 2007 and 2008 was initially meant to be a short-term response to an immediate threat. More than a decade later, however, markets and economies have become largely dependent on it.

What needs to be recognised is that once the state intervenes in the private sector, even when it is to save it, it doesn’t easily withdraw.

This is something that will be relevant globally, but must be particularly guarded against in South Africa.

Firstly, this is because the country already faced significant challenges before Covid-19. Even once the pandemic has been dealt with, those will remain.

“Ultimately what we want to do in the South African context is build a framework for longer-term growth,” Packirisamy points out. “But providing short-term relief to spend on goods and services today doesn’t necessarily mean that we are going to have higher long-term growth, because we are not spending on things like fixed-term investments.”

Seeing beyond the immediate crisis

In other words, the country can’t afford to lose sight of the longer-term imperatives. The kind of fiscal support that is needed now is not what the country needs to get onto a sustainable growth path. It therefore has to be rolled back at some point to allow for spending in other areas.

An additional risk is that the steps taken now may also be seen as a precedent by supporters of certain political ideologies.

“For instance, the South African Reserve Bank has really stepped up in making available all of its powers to stimulate the economy,” Hamilton says. “Usually the central bank would not be as liberal as it is right now.

“The concern could be that as politicians have now seen what power the Reserve Bank has and what levers it could pull, they might lean a little bit harder on the central bank and its role in future,” he notes.

Just as importantly, creating the right environment for an economic recovery after the crisis will require the kinds of extensive structural reforms that have been talked about for years. Largely, these needless state intervention, not more.

That means taking difficult decisions to withdraw government involvement in some areas, even while it may still look like it is needed.

This will take political courage and foresight, and South Africa will need a lot of that in the months and years ahead.

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Will govts step back?
Unlikely. Every democratic govt adores the udea of masses of people vulnerable and addicted to its support. So we have massive welfare programs.
This is especially true for govts that favor centralized national command councils.
A timely question this and one thst will need to be repeatedly asked in the months to come.

There is a highly competitive environment between businesses in an industry. The competition puts downward pressure on prices, on profit margins, drives efficiency, ensures the maximal utilization of resources and allocates capital to where the returns are best. These results of the competitive force in the free market environment benefit only the consumer. Competition on the free market ensures the best product, or service, at the best price for the benefit of the consumer. The consumer directs where capital goes, who becomes wealthy, who stays poor, who owns a property, and who does not. Everyone who owns property in this system must utilize that property to the benefit of consumers in some way or other; otherwise, that owner will quickly lose his property. Property is the reward for serving the consumer well. In the business environment, we get the best people, the most efficient people, the best qualified, because the system enforces accountability.

Another strong force competes with all businesses. This force competes with the free market itself. This force brings the opposite results of the free market. The government is a competitive force because just like businesses, the government wants to grow. The government does not grow by serving the consumer though; it grows by means of coercion. The government has a monopoly on judicial services, money printing, legal tender, tax collection, municipal services, electricity supply and the distribution of violence. The police and the armed forces back and enforce this monopoly.

The state does not have to be efficient, and it never is. It can tax its competition in the free market, it can use those taxes to support its own failures, or it can simply ban competition outright. Because the government does not have to be efficient, the biggest loser is the consumer who gets a poor service and pays a high price for it. The consumer is powerless in this situation. The government will grow by raising taxes, raising the public sector wage bill to buy votes, buy goodwill by printing money for social projects, bribe voters with their own money by devaluing the currency, and raise tax generation through the stealthy inflation tax. In the government, we get the worst people as leaders. The scum of society rises to the top leadership positions. Those who are willing to exploit their fellow man for personal gain. Those who are willing to make false promises and lie. Those who jump at any opportunity to confiscate the rights of citizens. There is only one way for leaders and government officials to own property, and that is by using its monopolies, by taking it from society.

Because governments impoverish consumers and because private enterprise enriches consumers, we need more free enterprise and less government.
“The more the state “plans” the more difficult planning becomes for the individual.” ― Friedrich A. Hayek

Sensei. The smartest guy on Moneyweb.

If I simply say “Thank You”, then by implication, I agree with you. That means that I am an arrogant fool.

If I disagree, then someone can say that I am a very modest person. In that case, Winston Churchill has the answer.

“He is such a modest man, who has so much to be modest about” – Winston Churchill

So, after some consideration, I decided not to reply to your kind comment.

A Sensei groupie myself. Have learnt a lot from him. Tonight I am deeply depressed, although I saw this coming. Our freedoms and liberties have been taken away in one stroke of a pen and we are not about to get them back. The meek response of the populace at having their rights taken away, also puzzling. Is this the real legacy of Apartheid? A cowering populace at the sight of jackbooted armed soldiers and police, those scars still so fresh that hard fought for freedom is immediately relinquished?

Griet, I am humbled by your remarks. I have learned more from you though. You thought me a very important lesson, in this comment section, about 3 years ago.

In reply to your comment, I wish to add the following.

“Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.” ― Ludwig Von Mises

In a democracy, the ultimate power rests in the CONSIDERED vote of the people.

Truly, they get the government-behaviour they ALLOW.

Citizens have only themselves to blame for the consequences of the bad decisions they made.

This applies as much to Zimbabwe as it does to the USA.

The entire mess and I mean every mess can be tracked back to one word that emanates from Government over and over and over, ‘framework’. It is the excuse word for meeting, eating and analysis paralysis. It means discuss, destroy, bulldust, steal, lie and cheat. It is closely followed by structural reforms, which translates how do we divide up what we steal. So here is a paradigm shift. Why not have just follow the constitution as was signed off by everyone and acknowledge that by the time you came into power the outdated socialist/communist rhetoric had already proved to be the most economically destructive option. Let the big business operate on level playing fields with no AA, no BEE, no quotas and they will expand and provide millions of jobs, but more importantly they will generate huge tax pools this given you so much more to steal. Its a no brainer just let business make you rich.

Aye, just shows the accuracy of the old parable about the goose and the golden eggs. The ANC cannot resist slaughtering the source of their wealth; the ANC elites that is. The ANC does not care about the poor vote cattle.

KevJones – re your comment: ‘the outdated socialist/communist rhetoric had already proved to be the most economically destructive option’ – is 100% true. On Google there is a list of around 30 countries that have been destroyed by Communism plus another list of about 50 more countries where it was the dominant political party until its destructive nature was realised, and it was kicked out. Communism (and its pink cousin Socialism) destroy human initiative. As the old Polish/Russian proverb states: ‘If I stand up, I get 1000 kopeks a month. If I lie down, I get 1000 kopeks a month. Why stand up?’ Yet we STILL have a Communist Party here, and people in govt who actually think it can work here. The mind boggles.

End of comments.

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