Who Cheered On the Debt Deal?

By Christopher Powers
STATESMAN SENTINEL
August 3, 2011

This week Congress reached an agreement to raise the debt ceiling.  The deal includes cuts in future spending increases over the next ten years, which means that the budget will continue to grow, only at a slower pace than originally predicted.  There were no current spending cuts or tax reforms in the deal. The president and the heads of both parties pushed it forward.

After the agreement was reached, I read a story that caught my attention.  It discussed the different actions of major corporate CEO’s in the US during the debt debate last week.  One particular section caught my eye:

After negotiations between Republicans and Obama broke down, chief executives of companies such as General Electric Co. (GE), BlackRock Inc. (BLK) and Citigroup Inc. (C) started to push harder for a breakthrough last week, mainly by signing group letters sent to Congress and the administration.

Goldman Sachs Chairman and CEO Lloyd Blankfein and JPMorgan Chase & Co. (JPM) chief Jamie Dimon were among 14 financial executives who signed a July 28 letter by the Financial Services Forum, a Washington trade group that represents the largest banks.

While the article claims many other CEO’s abstained from supporting legislation one way or the other, this special collection of corporate heads was very active in stressing the importance of finding a compromise to raise the debt ceiling.  It is probably no coincidence that the companies mentioned in the above example, were all major recipients and beneficiaries of the stimulus and TARP bailouts, some of the biggest tax payer funded expenditures in the last few years. They have since emphasized their important role in maximizing employment and economic growth, which has given them powerful sway in all economic policy debates.

Ludwig Von Mises often warned about the costs of attempting to fix economic problems with government intervention rather than the free market.  The government tends to be the easy path, but leads to more problems in the future, such as inequality and corporatism. The concentration of corporate interests and the outcome of recent economic policies seem to have borne out his predictions.

After the bursting of the housing bubble, government interventions, such as the stimulus and bailouts, so distorted the economy, that it now seems rational to fear spending cuts. Politicians and corporations have cultivated this rationality by emphasizing the importance of redeeming “sunk costs,” which have already put America on a path toward an ever-elusive recovery.

“Sunk costs” is an economic term for past expenditures.  The basic idea is that once money is spent on a project, it becomes sunk, and cannot be taken back.  If the project fails, the tendency is to say: “so much money was put into it. We have to spend more money to ensure the project’s success.  Otherwise it was all a total waste.”  In other words, they are using past expenditures to justify increasing future costs, even if the project is not worth it.

Economic policy since the beginning of the recession seems to have been based on this fallacy. The bailouts failed to bring on a recovery, so the stimulus was implemented, and when that didn’t work, the Fed used quantitative easing.  With the recovery still out of reach, politicians and corporations refuse to close the door on future government interventions.  The central planning philosophy has failed, but the interested parties continue to cheer it on.

Mises’s counterpoint to using government intervention was to use the free market to fix economic problems. Allow people the freedom to decide how to invest their own money in the economy, and before long, the markets will flourish.  This is the harder path to follow, because it requires humility and faith in something outside of a central plan, but it leads to greater freedom, equality, and prosperity for all.

Christopher is a graduate from George Mason University, where he received his BA in Economics. He has worked in financial and broadcast journalism. He currently lives in northern Virginia.