Why Government Intervention Makes Investing Even Harder

We told you it’d be a bumpy ride.

Stocks managed to recoup losses from the previous two sessions yesterday. The Dow ended higher by more than 200 points. Similar gains were registered in the broader markets and over in Europe and Asia, too.

Taken alone, yesterday’s action might look like quite a confident move by Mr. Market, as if he were strutting around in a brand new suit. We even heard one commentator enthusiastically refer to it as “decisive.” The fellow looked excited enough. He even seemed to believe what he was saying. It didn’t feel decisive to us, though. Unless by “decisive” the gentleman meant “changes mind daily.” Maybe “capricious” would be a better word…or “bi-polar”…or, better still, “indecisive.”

Nope, Mr. Market is not sporting any spiffy new threads. He is not strutting. He is struggling. And so are investors. They are struggling to determine what, if anything, about this “recovery” is real and what is phony baloney. With so much monopoly money swimming about, and so many state-sponsored data read outs, experts’ projections, predictions and balderdash concoctions, it’s a full time occupation just sorting the facts from the fiction.

And that’s just part of the problem when governments and meddlers crash parties they’re not invited to. They create artificial demand – or borrow it from the future – to make today’s numbers look better than they really are. Pretty soon, everything is out of whack. People who don’t need new cars trade in their old clunkers for shiny new autos; folks who need to save their money are encouraged to visit the retail stores and to buy more stuff they don’t need with money they never really had. Prices become distorted. Businesses make decisions based on the wrong information. They overspend and malinvest. From an investors’ perspective, it makes the already difficult job of putting your money to work that much harder.

As one friend recently put it, “I know how to trade markets…it’s trading whimsical government policy that’s the trouble.”

Dr. Marc Faber, editor of the venerable Gloom, Boom & Doom Report and perennial favorite at the Agora Financial Investment Symposium, addressed the worrying trend of increasing state intervention in his latest issue.

“…it is no longer sufficient to analyze macroeconomic and microeconomic trends and individual companies and sectors; we now increasingly need the help of a political analyst who can warn us of what governments’ next regulatory ‘Schnapsideen’ (ideas developed while heavily intoxicated) are likely to be.

“…government interventions in the free market,” Faber continued, “irrespective of whether they occur through monetary of fiscal policies or direct measures and regulation (such as the government taking over, subsidizing, or bailing out companies, etc.), bring about unintended consequences that are difficult to forecast. But what is easy to forecast is that the increased government intervention brings about more uncertainty about the future, and that uncertainty is poison for capital spending and sustainable economic growth.”

That the government busies itself distorting markets is bad enough. Sadly, however, that’s just the beginning. More often than not, their myopic actions end up destroying that which they set out to protect in the first place. Henry Hazlitt refers to this as the “fallacy of overlooking secondary consequences.”

Hazlitt explains: “This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups.”

Take, for example, the issue of minimum wages. It seems intuitive that raising the mandatory hourly salary of a low-income worker would positively impact the less privileged members of the workforce. That’s what makes the concept such a compelling, politically expedient sell for meddlers seeking re-election. Unfortunately, most often and for most low-income workers, this warm and fuzzy policy actually does them more harm than good.

“Most estimates suggest that each 10 percent increase in the minimum wage reduces employment in affected groups of workers by roughly 2 percent,” explains James Sherk, an economist at the Heritage Foundation. Sherk makes the point that raising the cost of labor beyond what the market naturally tolerates invariably results in companies cutting back on employees and on the hours they work. Result: higher barriers of entry for un- or underemployed people and less productivity for the economy as a whole. That, in turn, means fewer available jobs for the very people advocates of the minimum wage policy affected to be serving in the first place.

One only need look at markets where extensive government intervention is the norm to see how this little tale inevitably plays out. For some excellent examples of how not to run a government, we invite our fellow reckoners to have a look at how the welfare warriors of Europe are doing.

Joel Bowman
for The Daily Reckoning