The resurgence of central planning — VOICES for REASONVOICES for REASON

Since the start of the financial crisis, ARC has been pointing out that the cause was not the free market, but the unfree market. Another way of putting the point is that what failed was central planning.

Central planning puts economic decisions in the hands of a few government “experts,” rather than private individuals on an unhampered market. Interest rates in the U.S., for example, are not determined by supply and demand–they are determined by rates set by central planners at the Federal Reserve. And banks don’t set their own lending standards–those standards are dictated by central planners via the Community Reinvestment Act.

It was these centrally planned elements of the U.S. economy (among others) that caused the crisis. Yet Washington’s response has been to radically increase the level of central planning in the economy:

President Obama, with seven days of unprecedented market intervention capped by Monday’s ultimatum to U.S. automakers, has made one thing emphatically clear: He is the most powerful player in American business today.

Obama’s move to oust the CEO of GM and put Detroit on notice that he is prepared to let icons of American industry fail if they refuse to bend to his will was a calculated attempt to send a message, said an official often consulted by the administration. And that message was unmistakable: In any business-government partnership, Obama himself expects to play the dominant role.

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In a 150-hour period, starting last Monday, Obama put the government in the business of partnering with investors to buy up $1 trillion in high-risk bad assets. The move single-handedly caused a market rally and breathed life into bank stocks.

His administration then called for a whole new set of government regulations for high-flying hedge funds and other financial institutions. If successful, he will be the first president with the power to take over not only banks but also other financial firms, including big insurance companies (take that, AIG).

At week’s end, the president hauled in CEOs of big banks and later said he had lectured them on how to run better and more trusted businesses.

Most amazingly, he then pushed out Rick Wagoner, the CEO of General Motors, and vowed to let Chrysler fail if it didn’t merge with another company within a month.

It doesn’t stop there. Congressman Barney Frank is moving ahead with plans to give Treasury Secretary Geithner the power to regulate compensation for thousands of employees at companies that received TARP funds. This comes only a week after Geithner asked Congress to hand him sweeping new powers to regulate “systemic risk”–a term that no one can even define. (Note also the blithe assumption that centralizing so much power in the hands of a few bureaucrats does not pose a “systemic risk.”)

While on the face of it these steps might appear erratic and unpredictable, they are in fact remarkably consistent: at every step, Washington has limited economic freedom in favor of central planning. On a free market, an insolvent bank would be allowed to fail–in today’s central planning atmosphere that decision is left to Tim Geithner and Ben Bernanke. On a free market, pay is determined by managers (and ultimately stockholders) operating under the constraints of supply and demand–in today’s central planning atmosphere, those decisions are to be made by Barney Frank. On a free market, shareholders select their CEO–in today’s central planning atmosphere, Barack Obama decides who should be running GM.

It was only a few years ago that there was a virtual global consensus that central planning hobbles economies. At the end of the 20th century, every imaginable variant of the centrally planned economy had been exposed as a disaster. Countries such as India, China, Britain, and Brazil began making reforms that chipped away at their central planning bureaucracies.

These countries seemed to realize–to one degree or another–what economists such as Ludwig von Mises and F.A. Hayek had long established: that central planning cripples economic growth. Only on a free market, they argued, can the complex process of economic coordination take place efficiently–central planners not only should not, but literally cannot make sound economic decisions.

But like a Frankenstein emerging from the graveyard of the 20th century, central planning is back. Today Washington runs our financial system and our automotive industry, and is eagerly working to take over our health-care and the energy industries. And don’t fool yourself: the consequences of central planning will be no better now than they were the last time.

To stop this trend and bury the central planning mentality permanently, what people need to grasp is not only its economic insanity–but its moral depravity. They need to grasp that central planning of an economy means central planning of individual lives. More importantly, they need to grasp the moral nobility of the alternative: capitalism.