Mark Steyn on regime uncertainty and the rule of law:
Functioning societies depend on agreed rules. If you want to open a business, you do it in Singapore or Ireland, because the rules are known to all parties. You don’t go to Sudan or Zimbabwe, where the rules are whatever the state’s whims happen to be that morning.
That’s why Obama is such a job-killer. Why would a small business take on a new employee? The president’s proposing a soak-the-banks tax that could impact your access to credit. The House has passed a cap-and-trade bill that could impose potentially unlimited regulatory costs. The Senate is in favor of “health” “care” “reform” that will allow the IRS to seize your assets if you and your employees’ health arrangements do not meet the approval of the federal government. Some of these things will pass into law, some of them won’t. But all of them send a consistent, cumulative message: that there are no rules, that they’re being made up as they go along – and that some of them might even be retroactive, as happened this week with Oregon’s new corporate tax.
In such an environment, would you hire anyone? Or would you hunker down and sit things out? Obama can bury it in half a ton of leaden telepromptered sludge but the world has got the message: More Washington, more microregulation of every aspect of your life, more multi-trillion-dollar spending, and no agreed rules in a game ever more rigged against you.
Hat Tip: CafeHayek. Listen to Russ Roberts’ weekly EconTalk podcast here.
A few notes. Hayek frequently introduced himself as “Hayek — as in High Explosives”. If I made a change, I might add that to the intro.
And Hayek’s friends called him “Fritz”, not “Freddie”, though Hayek preferred “Friedrich” or “Professor Hayek”. In their letters, Keynes and Hayek addressed each other as “Dear Hayek” and “Dear Keynes”.
I might also note that in the 1930’s when Hayek was reducing Keynes to drooling — and sending him back to the drawing board (anybody still reading Keynes’ Treatise?) — Hayek had a good deal more hair on his head than Keynes.
We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits
This whole thing is well worth reading. But let’s start with The Quote of The Day:
One of the reasons the Federal Reserve gets so much good press is that it’s publishing most of it itself.
Hanke takes on that topic in the second section of his article. But the guts of the piece come right at the top — and in his cross hairs — Ben Bernanke:
In Jan. 3, U.S. Federal Reserve Chairman Ben S. Bernanke delivered a major speech at the annual meeting of the American Economic Association. In his formal paper, “Monetary Policy and the Housing Bubble,” Chairman Bernanke argued that the Fed’s monetary policy was not responsible for the U.S. housing bubble. He claims that faulty regulation was the primary culprit.
Chairman Bernanke’s claim is a great canard. The Fed is a serial bubble blower. Let’s first consider the Fed-generated demand bubbles. The easiest way to do this is to measure the trend rate of growth in nominal final sales to U.S. purchasers and then examine the deviations from that trend. Nominal final sales grew at a 5.4% annual rate from the first quarter of 1987 through the third quarter of 2009. Continue reading Hanke Detonates Bernanke on Fed Policy
In the section I excerpt below White explains how modern macro will remain broken without inclusion of the economic insights of Nobel winning macroeconomist Friedrich Hayek — work White discusses under the label of “Austrian economics”:
traditional Keynesian models, like the modern models, are not very helpful when it comes to prediction and are of limited use to policymakers. Worse, models in the Keynesian tradition also ignore two other considerations suspected of having great practical importance in the current crisis: the insights of the Austrian school of thought and those of Hyman Minsky.
In contrast to the Keynesian framework, Austrian theory assigns critical importance to how the creation of money and credit by the financial system can often lead to cumulative imbalances over time. These imbalances, which ultimately come down to investments that do not end up profitable, eventually implode in the context of an economic crisis of some sort. In today’s terms, unusually rapid monetary and credit growth over the past decade or so led to asset price increases that seemed to have little to do with fundamentals. It also led to spending much higher than historical norms. For example, the household saving rate in many English speaking countries fell to zero or below, even as the ratio of investment to gross domestic product in China rose to almost 50 percent. From an Austrian perspective the danger would be that these imbalances would revert, respectively, to more justifiable and more normal levels. Over the past two years we have seen something of this nature, in both asset prices and spending patterns in the United States, the United Kingdom, and a number of other countries. This is at the heart of our problems. Moreover, for those with an Austrian perspective, the continued and unprecedented investment-fueled growth in China is more a danger signal than a sign of renewed sustainable growth.
Mistaken spending decisions eventually result in stocks of unprofitable (for corporations) or undesired (for households) investment/durable goods that will take a long time to depreciate. In today’s terms, many industries that expanded sharply in response to high demand are now too big and must shrink. Such industries at the global level include financial services (particularly global supply networks), car production, wholesale distribution, construction, and many other intermediate and primary inputs. Moreover, with many production facilities in Asia geared to sell to foreigners, who no longer have the means to pay, a massive geographical reallocation of production facilities seems in order. From this perspective, Keynesian demand-side stimulus might well have near-term benefits, but could eventually have less desirable effects if it impedes necessary adjustments in production capacities. Over time, such considerations matter.
Cash for clunkers programs in countries with very low household saving rates are not optimal. Nor are attempts to hold down exchange rates for countries with huge external trade surpluses. Nor are wage subsidies to support part-time work, if jobs in the industries being supported will never come back.
While all this restructuring takes place, the structural rate of unemployment will be higher and the level of potential out-put lower. Moreover, the reduced potential will come on top of the more traditional effects of downturns associated with such factors as lower investment—sometimes suppressed by tighter credit conditions—and employment and wages that do not adjust quickly (see Cerra and Saxena, 2008). This implies that all policies to expand aggregate demand could stimulate inflation pressures sooner than expected. Given that some of these policies, such as quantitative and credit easing, are themselves unprecedented, and their effects commensurately uncertain, the added uncertainty generated by shifts in aggregate supply cannot be judged welcome now.
More:
there are other challenges to the conventional way of doing things as well. How can we blend into the Keynesian framework some of the insights of Austrian theory? In normal circumstances, using this Keynesian framework in a straightforward way to project output gaps and inflationary tendencies might seem satisfactory. For example, earlier this decade, such a framework seemed to provide an adequate explanation of the simultaneous observation of rapid growth, falling inflation, and very low real interest rates in the global economy (White, 2008). However, beneath this calm surface, Austrian “imbalances” were building up, which eventually culminated in the current crisis. The future macroeconomic research agenda must find ways to identify and react to these pressures. Fortunately, a significant amount of work in the area of identification has been done, and some promising areas for further progress suggested (see Borio and Drehmann, 2009).
One tendency that must be resisted is to see this work on imbalances as related solely to “financial stability.” In part, this tendency is related to the misconception that our current problems are limited to those of a financial crisis. Rather, an important aspect of the issue is how excessive credit and monetary creation can lead to imbalances outside the financial system, with significant macroeconomic implications.
Today, for example, households in the United States and a number of other countries seem likely to spend less, save more, and try to pay down debt. This seems likely to happen regardless of the capacity or incapacity of the financial system to give previous borrowers more credit. How the state of household and corporate balance sheets affects the desire to spend (as opposed to the capacity to spend) is a crucial issue for future research.
A leverage cycle lies at the heart of Friedrich Hayek’s account of the business cycle, as laid out in Hayek’s Monetary Theory and the Trade Cycle. Heterogeneous agents, asymmetric knowledge, and other limits to markets are bound up in Hayek’s account. (In fact, Hayek’s macroeconomic work on the division of knowledge in the context of heterogeneous goods is the original wellspring from which the whole of “information economics” began.)
New to the Internet — “What Price a Planned Economy” by F. A. Hayek, originally published April, 1938 in the Contemporary Review of London. Remarkably, many of the issues at hand are as fresh as today’s news columns:
in the direction of economic activity, say of transport, or industrial planning, the interests to be reconciled are so divergent that no true agreement on a single plan could be reached in a democratic assembly. Hence, in order to be able to extend action beyond the questions on which agreement exists, the decisions are reserved to a few representatives of the most powerful “interests.”
But this expedient is not effective enough to placate the dissatisfaction which the impotence of the democracy must create among all friends of extensive planning. The delegation of special decisions to many independent bodies presents in itself a new obstacle to proper coordination of state action in different fields.
The legislature is naturally reluctant to delegate decisions on really vital questions. And the agreement that planning is necessary, together with the inability to agree on a particular plan, must tend to strengthen the demand that the government, or some single person, should be given power to act on their own responsibility. It becomes more and more the accepted belief that if one wants to get things done, the responsible director of affairs must be freed from the fetters of democratic procedure …
Those familiar with Hayek’s The Road to Serfdom will also recognize early versions of many points and arguments developed in his famous best seller.
puts his dark magic to work explicating Labour man / Hegel expert Raymond Plant on Friedrich Hayek and “neoliberalism”. Quotable:
An increase in state power has always been the inner logic of neoliberalism, because, in order to inject markets into every corner of social life, a government needs to be highly invasive. Health, education and the arts are now more controlled by the state than they were in the era of Labour collectivism. Once-autonomous institutions are entangled in an apparatus of government targets and incentives. The consequence of reshaping society on a market model has been to make the state omnipresent.
a bona fide economist, or even just a noneconomist with common sense, would have realized that the Soviet Union was not producing “gross national product” to begin with, much less price-adjusted GNP. In the Soviet system of nonmarket prices, with no capital markets and no competition in the consumer markets, there was no role for entrepreneurship, which drives meaningful growth and development.
The Soviets were churning out government’s national product. It could hardly compete with even the admittedly flawed gross national product coming from the U.S.
Such knowledge would have been easy to acquire, even 45 years ago. Samuelson could have grasped the insights of such Austrian economists as Ludwig von Mises and F. A. Hayek, who had written extensively on the economics of socialism. One of their drawbacks for Samuelson is that they eschewed the mandarin perspective that an advisor to presidents found congenial. Another was probably that they wrote almost exclusively in English instead of math.
The appeal of math for a practitioner of what we might call mandarinomics is clear: By excluding nonmathematicians from the dialogue, it helps elevate the economics you practice to the esoteric status enjoyed by pure sciences like physics. But whatever the merits or demerits of math, its frequent use did occasionally turn Samuelson into one of those clueless types often satirized in economist jokes.
Take Samuelson’s celebrated work on “revealed preference,” that nice phrase he coined to capture the idea that consumer preference is revealed through active choice. (OK — maybe it doesn’t sound that brilliant, but at least it’s sensible.) It should go without saying that while consumers might choose consistently in terms of their preferences, those preferences rarely stay constant. Even if there were no new products altering our preferences, we do get older every year, and occasionally take on dependents. What we valued highly last year may therefore be nearly worthless to us now. But untroubled by such human considerations, Samuelson assumed that preferences are frozen, the better to apply complex math to “map” individual preferences.
His common sense, however, did occasionally thwart his penchant for counting angels on a pin’s head. A few years after that phone call about fiscal policy, I encountered Samuelson in a small seminar on free trade. The grey eminence surprised everyone by declaring that, despite having constructed a mathematical model on the drawbacks of free trade, he repudiated the results of his own model. His reason: The model did not allow for the influence of entrepreneurship, which would offset its results ..
Call for Papers: “The Sixth Annual Meeting of the Chinese Hayek Society,” Shue Yan University, Hong Kong, August 6-7, 2010
The Chinese Hayek Society will organize its sixth annual meeting at Shue Yan University in Hong Kong on August 6-7, 2010. The theme of the conference is “The Relevance of F.A. Hayek on China’s Economy and Society.” The conference invites proposals for panels and papers on related topics. Abstracts are due on March 1, 2010.
Contact Information: Prof. YU, Fu-Lai <flyu@hksyu.edu> and Dr. YUEN, Wai-Kee <wkyuen@hksyu.edu>, Department of Economics and Finance, Shue Yan University, Hong Kong
The last point I’ll make is that Friedrich Hayek wrote a really powerful little book called The Mirage of Social Justice, in which he picked up on the way the term “social justice” was being used in the first half of the 20th century. He said “social justice” had become a synonym for “progressive,” and “progressive” in practice means socialist or heading toward socialism. Hayek well understood the Catholic lineage of social justice, how the term had first appeared in Catholic thought, until almost 100 years later it became dominant on the secular Left.
The Popes, Hayek noted, had described social justice as a virtue. Now, a virtue is a habit, a set of skills. Imagine a simple set of skills, such as driving a car. The social habit of association and cooperation for attending to public needs is an important, newly learned habit widely practiced, especially in America. Social justice is learning how to form small bands of brothers who are outside the family who, for certain purposes, volunteer to give time and effort to accomplishing something. If there are a lot of kids who aren’t learning how to read, you volunteer for tutoring.
Tocqueville said the most fascinating and insightful thing about America: namely, that wherever in France people turned to l’Etat, and wherever in Britain people turned to the aristocracy, in America people got together and formed associations. They hold bake sales to send missionaries to the Antipodes, to build colleges. They invent a hundred devices to raise money among themselves. That’s what a free people do. That’s what a democracy is.
The first law of democracy, Tocqueville wrote, is the law of association. If you want to free people, for them not to be swallowed up by the state, you have to develop in them the virtue of cooperation and association. It’s not an easy virtue to learn at first, but it soon becomes a vast social phenomenon.
It’s not at all uncommon for 30 college students to show up for a presidential campaign in, say, New Hampshire and organize the whole state for their candidate. They’ve never done that before, but they know how to use a Rolodex, and they can very soon organize an entire state. It’s a skill they learned. It’s one of the great skills of Americans.
In America, we mostly go to meetings. Parenthood, you discover, is essentially a transportation service. Your kids go to so many meetings in a day that you need a sign on the refrigerator telling you which times everybody is scheduled for what and where they have to be. Americans are good at going to meetings, and that’s a tremendous skill to have. You can send a group of Americans in the Peace Corps, even a dozen of them, and they’ll figure out what they need to do and organize themselves how to do it. You don’t have to write detailed orders from headquarters. Association is a tremendous skill to have, but it’s essential for democracy.
And that’s what, in a word, social justice is–a virtue, a habit that people internalize and learn, a capacity. It’s a capacity that has two sides: first, a capacity to organize with others to accomplish particular ends and, second, ends that are extra-familial. They’re for the good of the neighborhood, or the village, or the town, or the state, or the country, or the world. To send money or clothes or to travel to other parts of the world in order to help out–that’s what social justice is: the new order of the ages, Rerum Novarum.
The tortuous times of the past two years, with nations embroiled in economic crisis, have revived an old battle between macroeconomic theories.Huge differences have evolved between political leaders and economists on matters of public policy and how to deal with the challenges.
The root of these philosophical differences lies in the macroeconomic theory of the last century. It is the dilemma of whether free markets create a more prosperous economy or whether government management of an economy is best.
In the 1930s the idea of government managed or planned economies emerged in the classic “General Theory of Employment, Interest and Money” by John Maynard Keynes.
This dominated economic theory until the concept of market economics gained favor, championed by the Austrian economist Friedrich Hayek. His book “The Road to Serfdom” challenged the merits of socialism and underlined the negatives of government intervention in the private sector. It argued the merits of free market capitalism and individual liberty ..
More:
Without the Keynesian public policy initiatives, the economy would not have become supercharged from 2002 until 2007, the credit crisis would not have occurred and the nation’s growth during the next decade would be higher and more stable ..
Imagine if a politician or an economist told you that the solution for the crashing economies of Spain, Iceland, and Great Britain was to increase taxation on those country so that money and resources could be transferred to the currently booming economies Bhutan, Argentina, and India. You’d identify those people as fools, frauds, or crooks.
Say hello to your President — and the pet economist of New York Times owner Pinch Sulzberger.
Because a transfer from the Have Nots to the Haves is what the Obama administration has been doing all year — routing resources and tax dollars away from economically distressed U.S. counties and re-routing those resources and tax dollars into the pockets of Obama’s government-dependent clients. And doing so with the shouting encouragement of crazed leftist economist Paul Krugman, who’s only complaint is that this confiscation and transfer of property from one group of private citizens to another group of government-favored citizens isn’t nearly huge enough.
A December study from George Mason University showed that Democratic districts have received nearly twice as much stimulus money as Republican districts — and the cash has been awarded without regard to how badly an area was suffering from job losses or income problems. Blue districts garnered the majority of the $787 stimulus package, getting an average of $439 million per district to the Republican average of $232 million.
And here’s a graphic:
So how did we get to the point where Academia and America are ruled by brain dead economics? I’ll update some thoughts here later.
We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past. — F. A. Hayek
