The True Forgotten Man

Contributed by Bill Connor

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” – from “Economics in One Lesson” by famed Economist Henry Hazlitt.

Henry Hazlitt wrote the above words in 1946, seeking to warn the United States about the dangers of creeping socialism. The general thesis of his masterpiece in economic theory (as well as his many other articles and book throughout the years): Competitive free markets, driven by the profit motive, will generate the greatest good for the greatest number of people. Further point is that government involvement in private enterprise (beyond prevention of monopoly and enforcement of reasonable law) inevitably leads to negative second- and third-order effects. Hazlitt gave solid historic example to prove the harm of government involvement in business. It occurs when government feels politically compelled to assist a certain special interest with visible and quick economic assistance. However, this involvement always comes with detrimental, second- and third-order effects on the general welfare. For the sake of brevity and current events, I will focus on Hazlitt’s example of government attempts to influence loans.

Hazlitt writes: “There is a decisive difference between the loans supplied by private lenders and the loans supplied by a government agency. Each private lender risks his own funds. When people risk their own funds, they are usually careful in their investigations to determine the adequacy of the assets pledged and the business acumen and honesty of the borrower … the government almost invariably operates by different standards. The whole argument for its entering the lending business, in fact, is that it will make loans to people who could not get them from private lenders … government lenders will take risks with other people’s money that private lenders will not take with their own money … the government goes into the lending business in a charitable frame of mind because it is worried about someone who cannot get a mortgage or other loans from private lenders because he does not have credit with them. He has no savings; he has no impressive record; he is perhaps at the moment on relief … More money will be lost to them. There will be a much higher percentage of failures among them. More resources will be wasted.”

If only America had followed Henry Hazlitt’s advice and kept government out of loans and mortgages. The history is clear and puts a lie to those demanding “more” government involvement in private markets. It goes back three decades and has directly brought current economic troubles.

In 1977 a Democratic Congress passed, and President Carter signed, the “Community Reinvestment Act.” In summary, this act began to put government in the business of pushing loan/mortgage approval in a similar manner described by Hazlitt above. The purpose was to expand home ownership to those who may not normally be able to obtain a loan/mortgage in the private sector. In 1993, under Bill Clinton the United States became a signatory to a new U.N. declaration describing “home ownership” a fundamental human right. During the Clinton administration, lending institutions came under increasing pressure to make “risky” loans/mortgages to those who would not have received loans without government pressure. Also in the 1990s, Fannie Mae and Freddie Mac were established as semigovernment lending businesses helping government influence the mortgage industry. This eventually allowed mortgages to be bundled into “securities” and traded on the open market. The whole system, being driven by government involvement and influence, allowed for the over-inflation of the real estate market and the subprime issues.

The whole “house of cards” came crashing down with disastrous results we all feel today. Foreclosures began to increase, while real estate values tumbled. The mortgage securities formed by Fannie Mae and Freddie Mac suddenly lost substantial value. Home values suddenly fell out from under many low-income buyers who put down little to no principal. This has brought an explosion in foreclosures. The collapse of housing jolted the values of most other major business interests.

The way out of this mess is not to dig ourselves deeper with more government involvement. Money spent to “bail out” various industries is coming from the American taxpayer, bringing future disastrous second- and third-order effects. We may be able to pass part of this debt to our children. However, that will cause an even greater catastrophe at a later date. Our children deserve better. We should recognize our economic mistakes came by short-sighted economic policy. We cannot allow ourselves to abuse the power of the sword of coercive taxes to now “bail out” sinking ships.

I end with a quote from “The Forgotten Man” by William Sumner (written in 1883) that sums up the immorality of oppressive taxation and why big government is not the answer to our problems: “A and B then propose to get a law passed to remedy and help X. Their law always proposes to determine what C shall do for X. What I want to do is to look at C. I call C ‘the forgotten man.’ He is the man who is never thought of. He is the victim of the reformer and social speculator and I hope to show you that he deserves your notice both for his character and for the many burdens which are laid upon him.”

Let’s put government back in its proper role, ensuring we and our children don’t bear the burden of the “Forgotten Man.”

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