Russell Roberts's Blog, page 1506

The case for doing less or nothing

John Taylor lays out the case for rules vs. discretion and in the process, does a superb job of summarizing his case for why doing less or even nothing would have been better than the activist government response over the last two and a half years.

One of the interesting questions Taylor raises in the paper is why what seemed to be a consensus in favor of rules changed so quickly into a consensus in favor of massive intervention.

Here is a nice summary of where the consensus used to be:

By the late 1990s there was about as much a consensus among economists as there ever was about an issue. In an assessment of fiscal policy in 1997, Eichenbaum (1997) concluded that "there is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible."  In a paper in 2000, I concluded that  "in the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizers….It would be appropriate in the current circumstances for discretionary fiscal policy to be saved explicitly for longer term issues, requiring less frequent changes."  And Feldstein (2002) wrote "There is now widespread agreement in the economics profession that deliberate 'countercyclical' discretionary policy has not contributed to economic stability and may have actually been destabilizing in the past."

So why did things change so quickly? Taylor gives a number of possible answers including the possibility that the politics trumped the economic research that had made the case for rules rather than discretion. He also points out that there was research on the other side arguing for the benefits of discretion over rules.

There is truth in both of those arguments but I think it is useful to add some public choice as well with economists as rent seekers–if you want to be a player, you have to be willing to play. So those economists who argue for the virtues of intervention get a chance to play. Those who oppose intervention remove themselves from any chance of riding the government gravy train.

It's a bootlegger and baptist argument–economists favored discretion and ad hoc intervention to save the economy knowing it is good for their own income and power. There's also some groupthink involved. When everyone is touting the virtues of job creation via fiscal policy, you feel a little lonely suggesting it's a sham. Finally, there is some risk aversion. Once you have some input into the policy process, better to do something than do nothing. Did Ben Bernanke really want to preside over the next real Great Depression while doing nothing? Better to do something, even if it's flawed. The fact that you gain enormous power along the way would help any mortal man come to the view that doing something is better than doing nothing.

Production vs. Predation

I agree with much of to my earlier post on .  (Also, some commenters to this earlier post of mine made points similar to the one raised by Will.)  The matter, as Will recognizes, is an empirical one: how much of the personal wealth in the United States is the result of market production to satisfy consumer demands and how much of this wealth is the result of special privileges and other forms of predation?

One thing's for certain: the proportion of personal wealth that is today the result of unjustified government-granted privileges is a great deal higher than it was before the 1930s – and even before 2008.  (I avoid here a discussion of intellectual property; I find that issue to be perplexing – so perplexing that I have, at least of yet, little of any merit to say about it.)

Still, my sense (for that is all it is at the moment) is that the overwhelming amount of personal wealth in the U.S. is indeed still the result of creative, entrepreurial, risking-taking industry played out in competitive markets.

One reason for my sense that this is true is that the U.S. remains remarkably rich.  Ordinary Americans – even poor Americans, and even in these especially difficult times – enjoy a standard of living that is historically off-the-charts high.  This level of widespread wealth cannot have been produced, and produced for so many years, if a substantial portion of wealth-getting activity was predatory rather than genuinely productive.  (What, however, is "a substantial portion"?!)

Another reason is that I sense that the stories of bankers and giant corporations getting bailed out with taxpayer money tend to distort our perception of wealth-getting.  The typical rich American – and, I suspect, even the typical super-rich American – is largely unknown outside of his or her relatively small circles.  His or her productive activity – as valuable and and as profitable as it is – is but a relatively tiny drop of prosperity in the great prosperity pool.  So it goes unnoticed.

Reasonable people can (and do) argue over what is the ideal set of institutions for wealth creation, and about how that set of institutions is ideally created and maintained.  However any particular person answers these questions, it seems true that, whatever set of institutions America has had at least up until a year or two ago, these institutions promoted the creation of a huge amount of widespread wealth.

Public Choice 101

I have never accepted the straw-man version of public-choice – a version in which that perspective on politics denies the role of ideas and ideology in shaping public policy.  (George Stigler is the most celebrated ambassador for that version of public-choice.)

Yet to deny that the typical politician will readily chuck away his or her principles for votes is naive.  The latest piece of evidence on this front is Al Gore's admission that he pandered, against his 'principles,' to voters in Iowa.  (HT Manny Klausner)  Here's the key 'graf, in which Gore explains why he voted for ethanol subsidies despite believing that they are poor public policy:

One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for president.

Note that Mr. Gore refers to his knowingly selling his principles for votes as a "mistake."  Unless he means that his effort didn't pay off with the top job in the White House, his soul-selling was no "mistake"; he knew exactly what he was doing and why he was doing it.  His soul-selling was an instance, pure and simply, of the hypocrisy and lying that is the stuff of too many political campaigns.

Dopey Strange

My former professor Randy Holcombe and I join forces to create this three-plus minute video on trade with China.  Critical feedback welcome.

Stop Selling Us Stuff At Such Low Prices!

Here's a letter to National Review Online:

Meant as a threat rather than as a slice of sensible advice, Pres. Obama – as reported by Deroy Murdock – warned on his recent trip to Asia that "No nation should assume that their path to prosperity is paved simply with exports to the United States" ("Stop Slamming China," Nov. 19).

Translation of the President's attempt to intimidate: "The American government will not stand idly by as other governments enrich America with subsidized goods and services.  No!  We will burden with additional taxes and regulations the millions of Americans who insist on stretching their incomes further by buying low-priced imports that we – using conveniently elastic criteria – determine to be subsidized by foreign governments."

Sincerely,

Donald J. Boudreaux

Kelvin on Coal

Like so many great scientists, Lord Kelvin was no great economist – as is evidenced by this selection of a 1902 article of his in which he predicts that the world will run out of coal.  Clearly, he didn't foresee problem-solving and creative entrepreneurs developing petroleum, hydroelectricity, and nuclear reactors as reliable sources of ever-less-expensive energy source.  Nor did Lord Kelvin understand the role of prices in conserving coal and in sparking new efforts for its exploration and extraction.

(P.S.  Please no notes informing me that Lord Kelvin's scientific methodology was also flawed; I agree that it was.)

Some Links

Truth on the Market's Larry Ribstein debates insider-trading regulations with Prof. Bainbridge.

I n this recent talk at GMU's Mercatus Center , perhaps the most knowlegeable human being I've ever met, Steve Davies, discusses the way we view the past and how that vision affects the future.

In this short video, Cato's Dan "Bulldawg" Mitchell analyzes White House economist Austan Goolsbee's justification for higher taxes.

The Wall Street Journal's Mary Anastasia O'Grady gets to the heart of what's wrong with Haiti.

And there's lots of great stuff in the November 2010 issue of The Freeman.  I hesitate to single out individual articles, for the entire issue is outstanding, but do pay particular attention to Bob Higgs's discussion of the recession within the Depression of 1937, Sheldon Richman's essay on deficit hawks and war hawks, and Manuel Ayau's thoughts on the division of labor.

Finally, Deroy Murdock bashes China bashers.

Bill Gates Has As Much Control Over My Life As I Have Over His

Here's a letter to The Economist.com:

Will Wilkinson's essay on income inequality in America is splendid ("," Nov. 19)."  In it, Mr Wilkinson correctly challenges New York Times columnist Nicholas Kristof's claim that "the wealthiest plutocrats now actually control a greater share of the pie in the United States" than in several countries of Latin America.  Rich Americans, Mr Wilkinson rightly points out, overwhelmingly are business people who serve the middle-classes and not political, military, or ecclesiastic predators who steal from peasants.

This fact makes Mr Kristof's claim that wealth is "controlled" in America highly misleading.

Except insofar as rich Americans succeed at getting government to protect their wealth with special privileges, such as tariffs, wealth is not "controlled."  Wealth is created only by serving consumers – that is, by making others wealthier – and it flees from those who stop serving consumers.  Should Apple stop producing innovative products that consumers willingly buy, Steve Jobs's fortune will disappear.  Should Southwest Airlines start charging uncompetitive fares, its shareholders' wealth will dissolve.  Should a super-wealthy hedge-fund manager consistently fail to increase the value of his clients' portfolio, he will become a not-so-super-wealthy ex-fund-manager.

In market economies, wealth isn't controlled so much as it is deployed in the service of others.

Sincerely,

Donald J. Boudreaux

Mob Economics

Here's a letter to the Los Angeles Times:

Robert Lutes writes that "Anti-government types tend to hoard their wealth.  If we have to force the wealthiest to help fuel our economy and rebuild our infrastructure, so be it" (Letters, Nov. 21).

Overlook Mr. Lutes's strange suggestion that people who wish to rein in government are especially likely to stuff their wealth into mattresses.  Overlook also his call for government to follow the same 'principles' that guided Willie Sutton.  Instead, recognize that the vast majority of people who have wealth (be they 'Progressives' from Manhattan or libertarians from Montana) have already "fueled" the economy by producing successfully for the market.

Public discussions of economics will continue to be confused unless and until the likes of Mr. Lutes come to understand that the challenge in fostering economic growth lies not in persuading people to treat themselves to desirable goods and services.  The challenge, instead, is to give people appropriate incentives to innovate and produce.  Efforts to meet this challenge are only set back by Mr. Lutes's economic ignorance and bank-robber ethics.

Sincerely,

Donald J. Boudreaux

A Banana Republic?

.