In the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith's: an individual who intends only to serve the public interest by fostering government intervention is "led by an invisible hand to promote" private interests, "which was no part of his intention."News headlines over the past few weeks have been rife with examples of the invisible hand in reverse that the Friedman’s highlight. The Jumpstart Our Business Startups (JOBS) Act that was signed into law this week exempts small, newly public companies (those with less than $1 billion in revenues...seriously?!) for 5 years from disclosing executive compensation, having “an auditor attest to their internal financial controls” and “comply[ing] with all the accounting rules required of public companies today.” Further, “banks underwriting their IPOs may be able to issue research reports on the stocks ahead of the offerings, a practice prohibited a decade ago after analysts pumped dot-com stocks their firms were helping take public.” While this bill may encourage more companies to become public, it also promotes several types of fraud that have cost investors dearly over the years.
Apart from the JOBS Act, the current debate over the individual mandate is in part due to the stranglehold on Congress held by private health insurance companies. Instead of creating a single-payer health care system, the current bill protects and improves the position of health insurance companies by mandating the entire population by their products.
These are just two recent examples but there are countless others that include special tax breaks for oil companies, bailouts of automotive companies and lax capital requirements for banks. This is not to suggest that individuals’ in government purposefully seek to promote the interests of a few over the many, but rather that the structure of the institutions and personal desire for re-election lead to this outcome.
From an economic perspective, I agree with many individuals on the left that large budget deficits currently continue to play an essential role in reducing unemployment and promoting economic growth. However, in light of this view, it is important to remember that big government increases the returns to and proliferation of crony capitalism. Weighing the benefits and costs of these options is rarely easy, but the wonderful aspect is that we remain “free to choose.”