The Government Is Just a Referee? Hardly.

by Brian Stanley
by Brian Stanley
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It’s common for people to say the government is a referee, whose role is to enforce the rules in the politico-economic game so that no one gets an unfair advantage. OK, so the people who say this are typically eighth-grade civics teachers, the terminally naïve or apologists for the state. Still, we do hear it. There is some truth in the statement, but for the sake of accuracy let’s amend the concept a bit and say that government is a biased referee who protects his friends and influences the outcome of the game to advance his own agenda. Better?

Examples of the government taking sides instead of being the impartial guardian of life, liberty and property are legion, of course. Considering the federal government here, we see an almost endless list, from tariffs protecting favored industries (Sugar, anyone?) to tax incentives that cause malinvestment by encouraging funding of pet sectors (It’s easy being green these days.) to tax policies that seek to discourage the use of disfavored goods (Think nuclear power, oil and gas, coal…pretty much any fuel source that actually works.).

But one of the best examples of the supposedly neutral government as partisan has been much in the news lately: monetary policy, specifically the injection of money into the economy to stimulate the economy. And the government’s role here is particularly effective in rewarding its friends because the way it prefers certain persons to others is rather subtle and unnoticed by many people. Certainly mainstream media members don’t seem to notice. (Speaking of being biased and having their own agendas….)

So how does the government – the Federal Reserve in this case – benefit certain persons through its dumping of cash into the economy? It’s not the mere act of increasing the money supply that causes the harm. Increasing the supply of money is a meaningless act, as long as the increase occurs equally throughout the economy and proportionately for all players in the economy.

"Whether the absolute amount of money in a closed economic system is large or small does not matter," wrote Ludwig von Mises. "In the long run the purchasing power of the monetary unit will establish itself at the point at which the demand for money will equal the quantity of money." Interventionism, An Economic Analysis, at p. 35. He added that "it does not matter…whether its total quantity of money is x million or 100 x million units. In the latter case prices and wages will simply be expressed in larger quantities of the monetary unit."

But the way the Fed injects money does not merely increase the amount of the monetary units. It gives it first to particular – and favored – persons or entities.

As Murray Rothbard explained using a hypothetical increase of $1 billion to the money supply: "In the first step, the Fed directs its Open Market Agent in New York City to purchase $1 billion of U.S. government bonds. To purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York. It then transfers that check to a government bond dealer, say Goldman, Sachs, in exchange for $1 billion of U.S. government bonds. Goldman, Sachs goes to its commercial bank – say Chase Manhattan – deposits the check on the Fed, and in exchange increases its demand deposit at the Chase by $1 billion." Then, Rothbard adds, "Chase Manhattan, delighted to get a check on the Fed, rushes down to the Fed's New York branch and deposits it in its account, increasing its reserves by $1 billion." The Case Against the Fed, at pp. 140–41.

As Mises pointed out about the injection of the money: "If, for instance, the government increases the quantity of money to pay for armaments, the entrepreneurs and workers of the munitions industries will be the first to realize inflationary gains. Other groups will suffer from the rising prices until the prices for their products and services go up as well." Interventionism, at p. 36.

Dr. Ron Paul, U.S. Congressman from Texas and recent winner of the presidential straw poll at the Conservative Political Action Conference in Washington, D.C., has also long complained about the fact that the Fed’s injection of funds benefits particular people. In his book The Revolution, a Manifesto (New York: Grand Central Publishing, Hachette Book Group USA, 2008), Paul, after noting that many people say inflation can’t be harmful because it raises prices but also wages and salaries, wrote: "This misconception overlooks one of the most insidious and immoral effects of inflation: its redistribution of wealth from the poor and middle class to the politically well connected.

"The price increases that take place as a result of inflation do not occur at once and to the same degree[,]" Paul said. "Those who receive the new money first receive it before prices have yet risen. They enjoy a windfall." Prices do begin to rise as the money slithers its way through the full economy, but: "The average person is now paying higher prices while still earning his old income…." So the result is this: "The enrichment of the politically well connected – in other words those who get the newly created money first: government contractors, big banks, and the like – comes at the direct expense of everyone else." Revolution, at pp. 142–43.

Rothbard, never one to sugarcoat things, pointed out that the actions of the Fed are precisely like those of counterfeiters, who also create money out of thin air for their benefit and the benefit of their companions.

"In real life, then," Rothbard wrote, "the very point of counterfeiting is to constitute a process, a process of transmitting new money from one pocket to another, and not the result of a magical and equi-proportionate expansion of money in everyone’s pocket simultaneously. Whether counterfeiting is in the form of making brass or plastic coins that simulate gold, or of printing paper money to look like that of the government, counterfeiting is always a process in which the counterfeiter gets the new money first." Fed, at p. 23 (italics in original).

And, Rothbard said, "In short, the early receivers of the new money in this market chain of events gain at the expense of those who receive the money toward the end of the chain, and still worse losers are the people (e.g., those on fixed incomes such as annuities, interest, or pensions) who never receive the new money."

Some will do doubt argue that the method the Fed uses is the only way it can inject the money. Maybe. But even if that’s true, the response to that is: Then don’t do it. It doesn’t work anyway. See, inter alia, Shawn Ritenour, "When Stimulus Does Not Stimulate," Mises Daily (July 8, 2009).

The comparison of the government to a referee needs to be retired. The government is the major player in the game. Its referee uniform is a disguise, which makes it all the more effective as a player.

Given the government’s failure at its refereeing role, it seems fair to ask: Is it better to have a biased, powerful referee who helps his friends win, or is it better to have no referee at all? Obviously the optimum situation would be to have an impartial and competent referee; but it seems that fewer and fewer people still believe that it is possible for the government to play this role. History has shown us that the impartial arbiter inevitably evolves into the protector and benefactor of certain players in the game. And because the government as referee can use guns, fines and imprisonment to enforce its will, it is indeed a formidable benefactor for its favored ones, and a formidable oppressor for its disfavored ones. .

As many people have noticed, players who play pickup basketball games or other self-refereed contests generally can enforce the rules pretty well on their own. Not without arguments, of course, but normally there is a sufficient amount of order to allow the games to be played. (For an article on the concept of spontaneous order, see John Sampson, "The Government Is Best That Governs Not At All," LewRockwell.com, Sept. 3, 2009.) Admittedly there are some players who will never play by the rules; but the other players can exert pressure on these people to conform to the rules or leave the game. And there is always a foolproof option available to remedy the problem of the unruly player: the aggrieved team can refuse to participate in the game. In other words, the offended team can secede from the game and create its own game with players who abide by the rules. Freedom of association allows this. If citizen participants in the politico-economic game enjoyed this same right to disassociate themselves from those who won’t play by the rules (or want to play by different rules), perhaps there would be less conflict and more cooperation in the politico-economic arena.

February 25, 2010

Brian Stanley [send him mail] is vice president and general counsel of The Hefner Company, Inc., an oil and gas and investment company in Oklahoma City, OK. He also maintains a private law practice.

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