| Peter Boettke |
Tyler Cowen argues that in hindsight, we should consider the bailout to have been successful in averting a financial meltdown of the US economy. He specifically asks me whether I can bring myself to admitting this.
But that is not because of what I would term first principles libertarianism. I am a consequentialist libertarian, not a natural rights theorist. Nor is my hesitation due to what I would term simple-minded economics. No, my hesitation is due to an empirically grounded and theoretically consistent political economy that looks at both the direct and indirect effect of public policies. The basic analytical framework derives from my reading of economic arguments from Hume and Smith, Say and Bastiat, and Mises and Hayek. And, yes, it is also influenced by Friedman and Buchanan (and several other modern economists that have contributed to our understanding of "the economic way of thinking"). As I have said multiple times throughout the discussion on the current crisis, a close reading of both Hayek's Tiger by the Tail and Buchanan and Wagner's Democracy in Deficit should be manditory for all interested laymen, journalists and policy makers.
The basic point I would like to make is that those long-run negative consequences that Tyler admits in his post might cause problems (perhaps even serious ones) are in fact problems. The cycle of deficits, debt, debasement doesn't just cause economic disturbances against a long-term growth trend, it has historically destroyed the economies of nations. If what the bailout and shift in both the traditional role of the Fed and Treasury perform have done is unleash this cycle of deficits, debt and debasement rather than constrain it (as it obviously has done!), then we have sent our national economic policies on a path of ruin that may well set us back for decades.
But there is more to my hesitation than just this issue of short-run and long-run consequences as can be gleaned by following the commentary I have made throughout the history of the debates over the financial crisis. I have been consistently against the bailout, and critical of Fed and Treasury behavior in general. Government activism isn't the cure for the crisis, it is the cause.
Tyler's argument rests upon claims that if factually true, I would have to agree to Tyler's point, and utter the words he fears I cannot bring myself to speak. Tyler's argument is a subtle one (and important one for consequentialist libertarians to seriously consider), but I believe it does rely on both faulty empirical claims and theoretical differences in perspective.
1. World of the Second, or Third, or N-th Best
I agree with Tyler that we do not live in the ideal institutional environment for a free market economist and many of the propositions of economics are worked out against the backdrop of a free market system. In the world of Central Banks, the policy analysis cannot be pursued as if we were existing in an ideal free banking system where decentralized banks could respond to market signals to adjust money supply to meet money demand in the most effective way possible. Instead, central bank monetary policy relies on clunky and inefficient mechanisms to try to accomplish this task of matching money supply with money demand. In this central banking world, it is much more difficult to distinguish between "good" deflation and "bad" deflation. A "good" deflation corresponds to declining prices due to productivity increases, a "bad" deflation corresponds to falling prices that can be attributed to mismanagement of money supply relative to money demand. It is the "bad" deflation that causes fear due to its association with a cummulative rot theory of economic crises. I have argued on the blog and in a number of papers is that due to Milton Friedman's explanation of the Great Depression, economists have fought inflation in theory but feared deflation in practice and did so to such an extent that any downward market correction was met by easy monetary policy to prevent "deflation". The Greenspan years in this interpretation were far from the "perfected practice of a maestro" but instead inflationary practice which produced malinvestment and coordination failures. I am persuaded by John Taylor's Getting Off Track, and the consequences of devitations from the "Taylor Rule" and how that easy credit fueled the artificial booms we saw in the decade prior to last fall.
Steve Horwitz and Bill Woolsey have repeatedly argued on this blog about the fine points in monetary theory associated with central bank policy, and admitted that in such a world quantitative easing of some sort or another might make sense at various times. I have taken a more traditional free market stance due to my concern with long-run inflation and the need to have immediate market adjustments guided by relative prices not distorted by continued inflation. I am all for easing of pain and suffering provided it doesn't cause even more pain and suffering down the road.
I am even more resistant to Tyler's argument about Fed and Treasury and Congressional decisions over the last year because I am not convinced by the facts used to justify the policy steps. As Anna Schwartz has repeatedly argued, Bernanke sees similarities between our current situation and the 1930s when in fact those similarities were (are) not there. Bernanke has an intellectual hammer forged through years of thorough research on the Great Depression, and thus in his position of policy decision making he sees a giant nail he cannot help but hit (with a bigger hammer than any Fed chairman ever used). Basic data presented by the Minn Fed, as well as discussed by Bob Higgs as well as Jeff Miron, Casey Mulligan and John Cochrane on issues related to liquidity, regime uncertainty, unemplyment composition, problems of moral hazard, effectiveness of fiscal policy, etc. have all at various times seemed to call into question the entire policy rationale used by economists and government officials. I am willing to be convinced that these empirical points are indeed wrong, but I have not been presented with such counter-claims on the data. Instead of critical engagement of the contending positions, we often just get in the blogosphere the separate claims presented. And in the instances where "debate" has in fact been encouraged --- such as the discussion between Brad de Long and Luigi Zingales, I found Zingales the more convincing presentation of economic argument.
Bottom-line, I don't believe we have seen a crisis of confidence, but instead a crisis of insolvency compounded by regime uncertainty caused by government's activism. In other words, we didn't have a credit lock-up a year ago due to liquidity issues, we had a credit lock-up due to regime uncertainty brought on by government decisions on who to bailout and who not to bailout for their bad decisions. Resources needed to be reallocated guided by price adjustment to bring production plans into alignment with consumption demands. Bailouts prevent the needed adjustments.
So not only am I dubious that the monetary policy the Fed has engaged in over the past year has been productive, I am extremely dubious that its expanded role beyond monetary policy in the economy. In fact, the dangers for the economy are significant, and as even discussed recently on both Tyler and my blog, the lack of a credible exit strategy makes it even more troublesome (remember those long-run consequences).
2. Counter-factual and Post Hoc Ergo Propter Hoc
I argued early on the discussion concerning the financial crisis that free market economists are going to confront a serious challenge and Tyler's post hits on the core issue. Markets are amazingly robust and resilient entities -- gains from trade and gains from innovation can off-set a lot of government stupidity. So wealth creation and economic growth can take place even in the face of government obstructions -- as Adam Smith argued:
The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.
Finally, let me conclude by pointing to Hayek's discussion of expediency versus principle in Law, Legislation and Liberty, Vol. 1. A consequentialist libertarian can, indeed must, address the general rules that are guided by principle. But expediency tends to defeat principle in political discourse, because of the focus on direct and immediate effects whereas principle tends to focus on indirect and long-run effects. Was it expedient to pursue the bailout? Of course. But was it a policy move that followed a working principle of public policy? Of course not. And once we include those indirect and long-run negative consequences the assessment of the effectivenss of the bailout on averting disaster is not as easy as Tyler suggests.