Government Policy and False Prosperity 

“Government cannot make man richer, but it can make him poorer.”
                                                              Austrian economist Ludwig Von Mises

President Bush’s plan to end the double taxation of stock dividends, which I support, has been both lauded and denounced by the usual factions in Washington.  Some of the President’s supporters, however, make the argument that a dividend tax cut will boost stock prices.  While tax cuts are always good for the economy, it’s dangerous to promote the idea that government can create value in the financial markets.  The collapse of stock prices in the last two years provides stark evidence that the Federal Reserve’s monetary policies of the 1990s did not create lasting prosperity, and we should understand that tax policy is no different.  Centralized planning via tax policy is every bit as harmful as centralized planning in monetary policy.   

My support for any tax cut is based on a longtime belief that our federal government is far too large, that it taxes and spends far too much.  I always support tax cuts because I believe government should be returned to its proper constitutional limits.  I do not support the idea of using tax policy for social engineering or supposed “stimulus,” where certain activities are encouraged and others discouraged.  This is not proper in a free society, and it instills the terrible notion that government should run the economy.  The great Austrian economist Ludwig von Mises understood that government could destroy wealth, but never create it.  This is why government should not be in the business of manipulating stock prices- the benefits are always illusory, but the harms are very real.  

The financial markets demand real value.  Merely reducing taxes on dividends or capital gains cannot make a company or stock fundamentally more valuable.  Any increase in a company’s stock price not based on real gains in productivity cannot be sustained for long, especially when the increase is caused by a reaction to government policies. Simply believing a company is worth a certain amount doesn’t make it so.  In the end, only results- in the form of profitability and growth- matter.  When government interferes in the financial markets through its monetary or tax policies, company values become distorted and investor knowledge become even more imperfect.  This encourages the kind of uneducated speculation we saw during the 1990s, and many investors today find themselves mired in debt and holding almost worthless stocks. 

Even in hindsight, many don’t seem to understand the true nature of the 1990s Fed-created financial bubble.  The prosperity enjoyed by so many companies and individuals was artificial, caused by Fed policies that vastly inflated the money supply and made the cost of borrowing money artificially low.  Much of the “money” made in the market, and most of the astonishing paper increases in market capitalization, were illusory.  The economic problems created by this artificial bubble are real, and we cannot hope to insulate ourselves from the ongoing correction merely by tinkering with the tax code.

We need to rid ourselves of the fantasy that wealth can be created by artificially raising stock prices.  The only stimulus our economy needs is sensible government policies.  A sound money system, low taxes, and a low regulatory burden would foster an environment where real productivity and economic growth could flourish.  Politicians need to learn from the failed Fed policies of the 1990s, and stop trying to fool the markets and the American people by promising prosperity through government policy.