by John Tamny, Toreador Research and Trading (Guest Contributor)
What I want to do is to look up C...I call him the Forgotten Man...He is the man who is never thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.
- William Graham Sumner
William Graham Sumner wrote the above essay in 1883, and the notion of the Forgotten Man was happily revived by economic historian Amity Shlaes in her masterful book of the same name on the Great Depression. While we regularly hear about the suffering experienced by individuals and businesses amid economic downturns, along with the actions of politicians meant to ease those sufferings, we all too rarely hear about the forgotten individuals and businesses who are routinely fleeced by governments seeking to show compassion for others with resources taken from them.
Much has been made in the past year of individuals, businesses and constituencies who, facing foreclosure or bankruptcy or both, were saved by politicians in the name of restoring the nation's economic health. Never explained by our "compassionate" federal minders was the rationale for excusing impressive economic stupidity on the backs of the prudent, including the very rich. And not asked enough by a media elite possessing a reflexive dislike of business success and wealth disparity is how an economy could be made better off through the subsidization of failed business practices so clearly inimical to economic prosperity.
So the bailouts of individuals and businesses alike continue as though the basic law of economics telling us there's no such thing as a free good is now false. But as the mildly sentient among us are all aware, nothing is free, and it's time to lament the Forgotten who've been forced to suffer the irresponsibility of others. Indeed, if it's still true that failure in a largely free economy is to some degree a result of bad decisions, it's surely worthwhile to elevate those who didn't fail, and who have sadly been penalized for not failing.
First up are the prudent savers in our midst. Adam Smith observed in The Wealth of Nations that savers are society's ultimate benefactors, and with good reason. Absent those willing to delay consumption, there would be no capital to fund the entrepreneurial brilliance of business visionaries constantly seeking to serve our unmet needs. Stating the screamingly obvious, much of the luxuries we enjoy today were created thanks to the parsimony of others.
But as they say, no good deed goes unpunished, and over the past decade both the Bush and Obama Treasury departments have regularly sought dollar devaluation in order to score points with manufacturers who, unable to see beyond the nearest of the near-term, believe prosperity is a function of currency debasement. The monetary result has been a dollar that has collapsed in value, and with that the savings of those who perhaps naively assumed the federal government wouldn't attack the very people whose frugality has traditionally funded economic progress.
And due to an investment sapping flight to the real which was driven by this decade's weak-dollar policies, the U.S. economy began to run aground in 2008. With banks and individuals suddenly in trouble owing to their shocking imprudence which was aided by "money illusion," the Federal Reserve expanded its balance sheet to drive down mortgage rates in order to save both. The latter, combined with the Fed's wrongheaded empowerment over the short-term rate for cash surely helped the irresponsible, but the Forgotten savers were forced to suffer dollar devaluation in concert with distorted rates that wouldn't compensate them for the greenback's devaluation.
All of this was done to further the politically correct, and bipartisan view among politicians that home ownership is the American Dream. In that case, it supposedly wouldn't be fair if capricious individuals who borrowed more money than they could afford to pay back from equally dim banks were forced to exit homes they never should have "owned" to begin with. Government enforced mortgage "cramdowns" were inserted into the economic dialogue as a result, but given the simple truth that there are no mortgages without savers first, the prudent were once again fleeced so that the incautious wouldn't have to bear the consequences of their own actions. Forgotten here are the 90%+ of mortgage-holders who stayed current on their loans, but who merited no sympathy from politicians who see greater value in helping the shiftless over the responsible. Also ignored were the many who didn't buy what they couldn't afford, saved while waiting patiently for home prices to correct, only to have the federal government use resources taken from them to keep home prices higher than they otherwise might be.
Considering businesses and banks alike, most experienced a great deal of pain thanks to what economists call recessions, but it's also true that most were able to remain in business free of government aid. Sadly, their reward for staying afloat amid trying economic times was the bailout of their various competitors who, if free markets had properly prevailed, they could have snapped up at bankruptcy prices. Put more simply, well-run businesses of all stripes were surely forgotten by politicians so afraid of failure, and as a result the well-run businesses and banks not in need of handouts missed the chance to greatly expand their market share.
And while the economy is not a person per se, it can't be stressed enough that any "economy" is merely a collection of individuals pursuing their economic interests. In that sense, the U.S. economy was forgotten amid charitably naïve efforts by politicians and bureaucrats to save it.
What politicians like Presidents Bush and Obama, and bureaucrats such as Henry Paulson and Ben Bernanke missed is that far from saving the economy, the bailouts weakened it. Indeed, while collapsing markets are painful, they're also a positive signal that commerce is being cleansed of business practices which, by virtue of their failure, are bringing an economy a great deal of harm.
In that sense Fed Chairman Bernanke's arrogant suggestion that his and Washington's actions saved the economy from long-term pain is entirely backwards. Simplified, the individual and business failures were the economy's true savior for clarifying what is and isn't economically stimulative. Unfortunately, intervention from the Commanding Heights excused those practices, thus setting the stage for future economic crises.
For too long the media/political conversation has been about who received what from a federal government that lacks any real resources to give anything it hasn't already taken from the productive. This is truly mistaken on many levels, and most prominently because in order for politicians to bail out anyone or anything, others must by definition be depressed.
Those depressed are the Forgotten individuals and businesses who acted prudently, kept the productive economy afloat, but were forced to witness the ghastly transfer of their wealth to the immature and unstable. Some would say this collectivist wealth transfer was good politics, but it would be more true to say that we ignore the burdens placed on the Forgotten Man at our peril.
About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel.
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