Why Should Christians Care About Economics? Part 2

By Jason, M.Ed., M.A.R., Headmaster

Crowding Out

Imagine you live in a small town with a corner hardware store, grocery store and pharmacy. These small, privately owned businesses form the heart of your town’s small shopping district. One day, you read in the local paper that a Wal-Mart Supercenter is going to be built a few miles away near the Interstate. It is certain to draw customers from all of the surrounding towns, including yours. As soon as you read this, you’re excited by the prospect of having such a convenient, one-stop, low-priced place to shop close-by. Then you’re also concerned for the small stores in the center of town, because now they have to compete with a bigger, more powerful store and they may be pushed out of business.

Your concern for your local stores in the face of overwhelming competition is similar to what economists mean by “crowding out.” Except, in the case of “crowding out,” the overwhelming competition comes from the government and not from another private business. Imagine if Wal-Mart was receiving billions of dollars per year in government subsidies. It wouldn’t seem fair, would it? And yet how many passenger-train services do we have in America today? Just one, a government-owned and operated entity, Amtrack. No one else can compete with a government-run, government, subsidized corporation. Even airlines, Amtrack’s only competition, suffer from the unfair situation and deal with added financial struggles as a result.

Yet crowding out is far broader than just Amtrack or the US Postal Service. Anytime the government gets heavily involved in an area of the economy, the private industry backs out because they cannot compete. The results can sometimes be disastrous. How did almost all mortgage securities in America come to be held by Fannie Mae and Freddie Mac? These two corporations are Government-Sponsored Entities (GSEs) have access to a special government line of credit and have government-guaranteed protections. These advantages not only led to their domination of the mortgage securities industry but also led them to take extraordinary risks from a sense of invincibility. These risks, in turn, led their competitors to take similar risks, especially when all of them sensed that they government would bail them out if everything went wrong with their schemes.

Why would the government get involved in backing mortgage securities? Fannie Mae was created as part of FDR’s New Deal, as a way to allow more people to buy homes. In fact, many of the risks these corporations took over the years were government-mandated programs to make home-ownership more affordable for more people. Thus, something begun by the government with the best of intentions (providing access to home-ownership) has led to a disastrous set of consequences for the global economy.

The mortgage industry is not the only story of disastrous crowding out. The inner cities and Appalachia provide another living example. Here, government has not taken over industries, but they have pushed out private-market jobs through well-intentioned welfare policies. Employers will not come into welfare-intensive areas because the people have little incentive to work. By paying welfare primarily to single mothers, the government also accelerated the destruction of the family by removing a powerful incentive for marriage.

Christians should care about crowding out because we care about the poor. So often, programs begun with the best intentions only end up hurting the poor they are designed to help. We should also care because we should want to protect the private property of all of our neighbors from being stolen by either thieves or the government. We shouldn’t be motivated by fear or self-protectionism, as others are. Rather, with regard for the welfare of our neighbor, rich and poor, we should oppose government schemes to bailout or take over or expand services in ways that will crowd out and devastate private industry and people’s lives.

Oh, did I mention that the big debate right now is over whether or not the government should provide a “public option” for health care (beyond the ones they already exclusively provide for the poor and elderly)?