Last week, in an interview with CNN, President Bush made a comment that may haunt his legacy for longer than he, perhaps, thought.  It wasn’t a statement like the ones liberals love to jeer at in their shallow, knee-jerk dispositions.  Rather, it was a comment that Bush looked like he had carefully thought through.  It was a revelation of honesty–a trait for which he never gets credit. 

Bush understands the power and the value of free market economics.  So it was a surprise to hear him say, “I’ve abandoned free market principles to save the free market system.”

Bush $13.4 billion rescue of GM and Chrysler provides a fitting end to a year in which his administration–for whatever reason–has gone socialist . . . and the government has gone statist.

Statism refers to a form of government or economic system that involves significant state intervention in personal, social, or economic matters.

With the federal bailouts of AIG, countless banks, and, now, the American auto industry, the government continues to steer our society towards centralized economic planning.  We already have a socialist retirement system (Social Security) and a socialist elderly prescription healthcare system (Medicare).

But this latest statist push, according to Bush, is not all for naught.  By “abandoning free market principles,” Bush thinks he can ”save the free market system.”  Can that be true?

History has always proven otherwise.  Europe is a prime example.  Due to statist and socialist policies at various levels in European countries, Europeons are, across the board, 30% poorer than Americans. 

Even now, in the U.S., three months of bailouts and increased government intervention is already undermining the economy.  Today’s Bloomberg Press illustrates several concrete examples of this contraction:

• Future investment may be allocated less efficiently as risk-averse politicians make business decisions.
• Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it.
• Government borrowing may push up Interest rates in order to finance trillions of dollars of bailouts.
• Shares of stock might be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector.  “If the rules of the game are changing, people are reluctant to invest in the stock market,” says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management.
• Investors trying to decide where to put their money are “gambling very much on what they think the government will do, not what they think about the company,” Sapienza says.  “That’s why there’s so much volatility.”
• The bond market will be affected because it will be forced to absorb larger increases in government debt.  Yields on Treasury securities (already at record lows) eventually “will go up significantly and dramatically” under pressure from added supply, says E. Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods Inc. in New York.
• Businesses will be less likely to deploy capital in ways that spur growth and profits.  For example, car makers may be slower to innovate or cut costs, and financiers may shy away from lending to entrepreneurs.
• Bigger government deficits could also spell trouble down the road if they lead to higher borrowing costs or prompt consumers to save more now on the assumption that bigger shortfalls will mean higher taxes later.

In other words, by abandoning free market principles, the government has brought the economy to a halt, robbed any chance of a quick recovery, and laid the groundwork for a significant fiscal crisis. 

Rather than save the free-market system, Bush sponsored a movement in the opposite direction.  He may have thought that he had to fight the fire of this financial crisis with some fire of his own.  Instead, however, he effectively injected more cancer into a cancerous system. 

History and the recent results of these numerous federal bailouts prove that his comment, while thought-provoking, is ultimately flawed.  By abandoning free market economics, the government is pushing this country and this economy into pre-Reagan stagnation.     

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