Italy and Capital Controls

LvMIC:

In the free economy no production czar tells a man what he should do. Everybody plans and acts for himself. The coordination of the various individuals’ activities, and their integration into a harmonious system for supplying the consumers with the goods and services they demand, is brought about by the market process and the price structure it generates.

—Ludwig von Mises writing in Planning for Freedom

Scrap the free economy, it looks like Italy is going lock, stock, and barrel toward further economic controls which will only deepen its present troubles.  Via Zerohedge:

Here are the latest developments which are coming in at extraordinary speed:

• The appointment in December of an unelected government. This government has no accountability and no fixed time mandate. It is being sold as being “technocratic”, but is in fact headed by a University Professor who is distinguished for: (i) having been head of the EU Internal Market Commission, where he used the power of the State to fine Microsoft and other corporate that were “getting too big for their boots”;(ii) being a good friend of Romano Prodi, another University Professor from the Communist  heartland of the University of Bologna and creator of the Euro (more on him later);(iii) a paid hand of Goldman Sachs and a friend of Mario Draghi, another Goldman puppet who dispatched of the government of Berlusconi within days of taking the helm of the ECB; (iv) a fervent believer in the pre-eminence of the state over the individual;
• The passing of an extraordinary edict making cash transactions of more than Euro 1,000 illegal (not subject to reporting – just plain illegal). Following Prodi’s own desire, the existing regime has indicated that this level will be progressively reduced to a limit as low as Euro 300. Hence cash is maybe for the first time in history no longer legal tender (over Euro 1,000, for now);
• A requirement that credit card companies report all transactions carried out by Italians, in Italy and abroad to the fiscal authorities;
• Delays and refusals by banks in allowing customers to withdraw  cash balances of as little as Euro 10,000;
• Finance Police has placed cameras at the physical borders with Switzerland to register all license plates. In addition, currency-sniffing dogs have been deployed at the border…

Not only will these “controls” result in more capital flight away from Italy but they will make the country a lot less attractive to foreign investment than it already is.  Basic economics teaches that when price ceilings are imposed without any change to personal demand curves, shortages erupt.  Black markets emerge as more time, effort, and resources are dedicated to completing what used to be unproblematic economic transactions.  Human demand is met if the price is right and the barriers aren’t overly burdensome.  One look at the underground recreational drug market in any developed country reveals as much.

So while price and capital controls are regarded as illogical in any economical sense, they are often the reactionary response of a government losing major sources of revenue.  It’s no breaking revelation that Italy, along with other fiscally irresponsible countries in the Euro zone, is suffering under its own crushing public debt and increased cost of borrowing (though slightly relived for the time being due to the monetary intervention of the ECB and its LTRO program).  High level bureaucrats, desperately trying to keep their jobs, are looking to tap any source of taxable income.  This means tracking as many transactions as possible to know exactly where to “legally” extract whatever money they can out of country with an unemployment rate as high as the United States.  Such draconian measures are no fix however as Mises points out:

The government’s interference with the price of a commodity restricts the supply available for consumption. This outcome is contrary to the intentions which motivated the price ceiling. The government wanted to make it easier for people to obtain the article concerned. But its intervention results in shrinking of the supply produced and offered for sale. If this unpleasant experience does not teach the authorities that price control is futile and that the best policy would be to refrain from any endeavors to control prices, it becomes necessary to add to the first measure, restricting merely the price of one or of several consumers’ goods, further measures.

Intervention begets more intervention as it never solves the underlying problems associated with previous attempts at governmental control over the uninhibited, free market.  The capital controls in Italy are nothing more than a frantic attempt to maintain a status quo that is clearly unsustainable.  The solution to economic distress is, and will always be, massive cuts in government spending, taxes, and the public sector workforce.  Such unleashes the infinite possibilities entrepreneurs can pursue to please consumers without the burden of being forced to continually fund an over bloated government.