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Wednesday, April 7, 2010

The Insanity of Government “Reform”

Rule by experts never seems to work.

Albert Einstein’s definition of insanity – repeating something and expecting different results – is known to nearly everyone. Yet mere knowledge of this definition apparently has not kept the “best and the brightest” among us from becoming its practitioners.

The belief that government continually “reforms” itself, correcting earlier “mistakes” and moving toward “perfection,” has dominated our body politic since the Progressive Era. American history books celebrate the Progressivism of a century ago in which a combination of intellectuals, politicians, and business leaders sought to lay aside the “chaos and corruption” that was the market economy and replace it with something that was “efficient” and “equitable.”

Anyone who has taken a typical American history course, whether in high school or college, can remember how the expansion of government through a series of “reforms” has been touted as “progress.” We read how Congress passed the Pure Food and Drug Act after Upton Sinclair’s book, The Jungle, exposed unsanitary conditions in meat-packing houses, how government collared Big Business by establishing economic regulation and antitrust rules, and how the “people” finally controlled the huge fortunes made by businessmen like Andrew Carnegie and John D. Rockefeller earned via the income tax.

Then there is the establishment of the Federal Reserve System, which gave us a “modern” financial system (and helped give us the Great Depression). The list seems endless, and the message is clear: The expansion of the powers of the federal government made American society better and more accountable.

The Progressives reasoned that a decentralized market economy, which operated via a price system and private ownership (and thus control) of property was chaotic and unfair. Men who “manipulated” the system could grow fabulously wealthy while driving others into poverty. Furthermore, business moguls often were uneducated men who did not appreciate the value of education and who lacked the “expertise” to properly “run society,” according to these “reformers.” The Progressives believed that a society dominated by wise “experts” could lead government agencies that would better utilize resources through what they called a rational approach. (The Progressives ultimately won these businessmen to their side, creating even more problems, as Progressivism became a statist alliance of business and government.)

Such ideals clash with reality, but that has not stopped the eternal drive toward “reform.” Thus, the recent medical legislation is called “reform,” government takeover of student loans is called “reform,” and recreating the government-led financial cartels of Wall Street is called “reform.”

What is the background of the current set of “reforms”? They are attempts to “fix” monstrosities that previous “reforms” have created. ObamaCare is attempting to repair damage created when Congress 45 years ago created Medicare and Medicaid, thus setting the stage for wild cost distortions in medical care that have grown exponentially worse in the last two decades.

The “financial reform” now being touted by Congress attempts to “fix” the “financial reforms” (wrongly called “deregulation”) that came about 30 years ago. Those earlier “reforms” were an attempt to undo the damage that was done by the banking “reforms” created during the Great Depression which, ironically, were passed to deal with the problems caused by earlier “reforms” of the banking and monetary system, and especially the creation of the Federal Reserve System.

If someone steps back and examines the whole picture, one can see how the original “reforms” of the Progressive Era created perverse incentives and strengthened the dead hand of government against the creative hand of the market. For example, legally requiring medical care to be financed by third-party payments creates huge distortions in the production structure of that care, which then result in even more “reforms,” in a never-ending attempt to fix what cannot be fixed.

The perverse process is endless. We see it not only in medical care, but finance, transportation, farm subsidies and regulations, and just about every other area of our lives. Yet government, urged on by intellectuals and the media, soldiers on. Like Bill Murray’s character in Groundhog Day, we are forced to repeat the old errors, except that in real life, government never gets it right.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.