Credit Diverts Production

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Credit Diverts Production

Chapter disclaimer: This analysis is complicated by inflation, so Hazlitt assumes that the credit that diverts production is “non-inflationary,” because what is actually going on is not influenced by inflation.

Government “help” to business can be as scary as government opposition or taxation. Hazlitt mentions that “a frequent proposal of this sort in Congress is for more credit to farmers.” Farmers still receive subsidy today, as do a laundry list of other things, such as green energy. We are lectured that, allegedly, “the credit supplied by private mortgage companies or banks is never “adequate.”

This is wrong for a two important reasons. First, it is incomplete only to view things “from the standpoint of the farmers that borrow. The other is to think only of the first half of the transaction.”

These proposals lose a lot of their luster when you realize that the “need” for more credit is the same thing as saying there is a  “need” more debt, since in reality all honest credit to one person is debt to another person.

Supporters offer the following line of reasoning. A poor family is using sub-standard production methods solely because they cannot afford to buy the correct capital machinery. Everybody can also see that a loan given to this person will increase productivity; while possibly enriching the entire community. Does that make this loan a no-brainer; a win-win?

Of course not. The process of wealth creation described above is precisely what happens on the free market everyday. Private lenders are more than willing to loan credit worthy borrowers money to engage in commerce or purchase a house or farm.

The key difference: “Each private lender risks his own funds. When people risk their own funds they are usually careful in their investigations to determine…” the chances of repayment. What this means, then, is that government must either operate by this exact same standard; or they must be willing to lower the lending standards. Since it would be odd for the government to enter a market and behave exactly as market operators do, it is easy to conclude that government will make riskier loans. As Hazlitt puts it, “government lenders will take risks with other people’s money (the taxpayers’) that private lenders will not take with their own money.” The predictable end result, always and everywhere, is loan default and economic waste — like in the case of the housing bubble which was “predicted” by the analysis in this chapter.  

Additionally, private lenders are “selected by a cruel market test.” Only the good lenders get their money back and can make more loans; meaning, according to consumers, these lenders have put society’s scarce resources to good use.  

At best, government lenders are those who “hypothetically” know how to make good decisions, without being subject to the test of profit and loss.

At worst, however, with government decisions come loans to friends, bribes, scandals, etc.; not to mention the fact that political incentives are short-term and election driven instead of proper long-term use like resources under private control.

Even if all the previous analysis is ignored, it would still be a bad idea for government to intervene into the loan market. It is a simple truth that “government never lends or gives anything to business that it does not take away from business… when the government makes loans or subsidies to business, what it does is to tax successful private business in order to support unsuccessful private business.”  There is no shortcut to wealth creation, and government sponsored hocus pocus will only confuse people looking for the correct path.