A loyal reader of this blog (D.G. Lesvic), chided me on email this morning for not posting more relevant items and instead engaging in a mutual admiration society. I am not sure I would go along with him on that assessment, but he does have a point. I am seeing more foreclosure signs being placed in front lawns in Fairfax City, gasoline prices are rising, the investment climate is uncertain, and the candidates are tripping over each other to propose governmental solutions. And as our loyal reader noted to me, the WSJ column by David Wessel points us to the fundamental issue of inequality and asks me "why are you silent on it".
The basic lessons of political economy seem to have been lost in much of the current debate. Government cannot be seen as a corrective, but at best should be viewed as a referee. The incentives politicians face are distorted, and the knowledge they have to work with is constitutionally limited, that efforts to tinker with the economy let alone guide the economy are destined to fall short of the goal and in most cases in fact make matters worse. From Bastiat to Friedman the problem of crowding out of private investment by public investment has been noted as a source of trouble. And perhaps nowhere has the problem been stated so clearly as in Adam Smith when he wrote: "The statesmen, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." (1776, Bk IV, p. 478).
Yet in our current political context we are once again looking for government to be an active player in the economy, and for the economists to be saviors with their grand plans. But it was precisely government policies that created the problems we confront today (and got us into the mess in the 1970s, and the mess of the 1930s before that). I used to often joke when describing the evolution of government policy tools with respect to macroeconomics that it is as if the Yankee shortstop (I have stopped using this since Derek Jeter took over the job so this goes way back in my teaching career) kept letting balls roll through his legs and instead of replacing the shortstop, we just kept giving him a bigger glove. Now the glove is so big the shortstop cannot even move to cover the ground ball hit to his left or his right. What manager or team owner would allow such a thing? Yet we do all the time with respect to public policy. The Fed screws up, give it more power. Lets just try harder next time. IT DOESN'T WORK.
Not all economic voices are united on this give the government more power and we will try harder next time, but those that work closely with government tend to be. As F. A. Hayek put it once, the economist is called upon to offer policy advice more often than any other social science, yet suffers the fate that once his advice is given to have it discounted as soon as it is uttered. Obviously Hayek had a certain type of economists in mind when he made that statement because some individual who call themselves "economists" are in fact listened to everyday. What Hayek meant is the economist who understandings incentives, realizes the limitations of knowledge, and focuses his analysis on structures and constraints. It is that economist -- the one worthy of the name -- that places parameters on people's utopias, and in so doing is actually viewed as impolite and impractical in the context of politics. But getting excluded from a conversation that is corrupted by the lust for power is not a sin --- if you speak truth to power and get kicked out you have done your job, if you speak nonsense and you get kicked out, then you have failed to do your job and you have discredited your discipline. Sorting out which one has happened requires that you take a stance on what is good and what is bad economics. Again, Bastiat might be a useful starting point in his emphasis on direct and indirect (what is seen, and what is unseen) --- good economics sees not only the direct and immediate, but also the indirect and distant consequences of government policies.
So what should we economists be insisting on during the current political discussions:
1. Intentions do not equal results
2. Innovations that are economically viable cannot be orchestrated by government, but must come through the free market
3. Policies to eliminate inequality distort incentives and often harm the very individuals they intend to help
4. Politicians possess a shortsightedness bias and policies are adopted in order to concentrate benefits on well-organized and well-informed interest groups and disburse the costs on the ill-organized and ill-informed mass of voters/citizens. What is good politics in other words may very well be bad economics, and what would be good economics might be bad politics. In short, we should not expect politicians in a democratic system to adopt good economic policies because the costs of doing so may very well be their inability to get elected.
There are no doubt many other points we economist could be insisting on as Obama and McCain run for office and the US (and perhaps world) economy continues in a tailspin. But the bottom line, we will never get out of this current economic downturn until the government gets out of the way and the creative powers of the market society are unleashed to correct the previous malinvestments caused by government distortions, and to adjust to changing circumstances to coordinate the creative innovations of producers with the demands of consumers to live more enjoyable and comfortable lives. Bob Higgs's work on post-WWII recovery and the Great Depression should be on the reading list of every politician this summer --- neither the New Deal nor WWII got us out of the Great Depression. Government policies cannot do that job for us --- we need to stop looking at government as a corrective to our ills.
Wealth creation, not income distribution, is the way out, and market processes and not governmental decisions will be source of that wealth creation. Who will be the most famous and boldest economist of this generation to state that clearly to the politicians the way Milton Friedman did throughout his career? No need to work for Obama or McCain, but there is a need for someone to make the case for the market economy in this time of rising oil prices, depressed housing, and uncertain investment.
Government policy got us into this mess fueled by bad ideas of social justice and public policy, and the incentives within policy making which bias the policies proposed and adopted in a certain direction, and we have to understand that government policy will not get us out of this mess --- especially if the bad ideas on social justice and public policy persist in our culture. We are in a situation similar to the mid- to late- 1970s again, but this time we don't have a Milton Friedman producing FREE TO CHOOSE, and we don't have a political leader like Reagan who employed Friedman's rhetoric (if not his actually proposed solutions) within the political debate.
Pivotal times require pivotal people. Think of the economists in the 1970s that could articulate the case for limited government: Friedman and Hayek lead the list, but also Buchanan and Stigler, Becker and Coase, Alchian and Demsetz, Meltzer and Brunner, etc. Who would be on your list today that has achieved the same scientific status as these men, but also are articulate spokesmen for their position on limited government? If only Paul Krugman, Jeffrey Sachs and Joe Stiglitz can claim to be both scientifically respected, and capable of being public intellectuals on policy relevant subjects, then the policy making game is over before it has started isn't it?