ActualPublicPolicy: October 2014

THE GLOBAL ECONOMY is a mess today because most economists, bankers and political leaders don’t understand that most basic of subjects: money. When it comes to monetary policy, they have it backwards, thanks to the misbegotten ideas of John Maynard Keynes. Before Keynes and like-minded peers, economists understood that the real economy was the creation of products and services. Money was the symbol economy. It represented what people had produced. It was a facilitator of commerce.

The ability of people to trade with one another is how we achieve a higher standard of living. Money measures wealth; it is not wealth itself. It is a claim on products and services that people have created. That’s why counterfeiting is illegal; it’s thievery. But when government does this, it’s called quantitative easing, or stimulus.

Money reflects what we do in the marketplace. But instead of recognizing that basic truth, Keynes posited the exact opposite. To his way of thinking, money controls the economy. Change the supply and you can change economic output, just as a thermostat controls a room’s temperature. Government, not the marketplace, is the real driver of commerce. Other “economic actors,” such as investors, venture capitalists, entrepreneurs and business executives, are secondary; they merely respond to the prompts of government officials and central bankers. (While monetarists focus exclusively on the money supply, Keynes thought it useful to employ fiscal tools, such as spending and taxes, to help steer the economy. He and his acolytes, however, had virtually no concept of taxes being a barrier or hindrance to commercial activity; they simply saw them as a way of controlling an economy’s total purchasing power, or “aggregate demand.”)

Keynes did share one crucial view with the classical economists: They both saw the economy as a machine that should run smoothly. So-called business cycles–booms and busts–were phenomena to be studied with an eye toward eliminating them. Classicists thought more “perfect competition” among businesses, minimal government regulation, prudent levels of government spending, a gold standard and low taxes, along with combating unsound banking practices, would do the trick. The cult of Keynes thought that free markets were inherently unstable, capitalists were their own worst enemies, and wise government officials, like Keynes, were necessary to save businesspeople from themselves. Get the government controls right–primarily monetary–and the economy would purr smoothly forever after.

Joseph Schumpeter thought both the classicists and the Keynesians were utterly wrong in looking at the economy as if it were a clock. To him “equilibrium” didn’t exist. The marketplace was always changing; the pace would vary, but things never stayed still. New methods, inventions and the constant rate of improvement of existing things meant that government officials could never run an economy the way one drives a car.

The only single economy is the global economy. Yet Keynes assumed the British economy could be treated as if it were an isolated entity. Too many countries today formulate policies under a similar assumption.

The Forbes 400 list of the richest Americans and our list of global billionaires demonstrate that Schumpeter had it right. “Economic actors” are the drivers. Government can either impede their activities or create an environment in which they can rise and flourish.

This would seem self-evident. Yet economies all over the world are in trouble. Government leaders and economists galore talk about monetary policy as if it could rev up economies that are staggering under excessive taxation, suffocating regulation and massive government spending. (Remember, government doesn’t create resources. It gets them through taxation, borrowing or inflation, which is–Keynes got this right–another form of taxation.)

Most governments loathe the truth that the people on our lists are essential to prosperity and a higher standard of living. Government wants the benefits of what such people create, but it doesn’t want anyone to get rich from the creating.

(See Steve Forbes’ new book, Money: How the Destruction of the Dollar Threatens the Global Economy—And What We Can Do About It.)

A Nobel Economist’s Caution About Government

Friedrich Hayek warned that intervening can make things worse. ObamaCare and Dodd-Frank, anyone?

Donald J. Boudreaux And

Todd J. Zywicki

WSJ Oct. 12, 2014

Forty years ago the Nobel Prize in Economic Science was awarded to a scholar who believed the prize perhaps should not exist. As he graciously accepted the distinction in 1974, Austrian-British economist Friedrich A. Hayek worried aloud that thinking of economics as a science might fuel what he called “the pretense of knowledge”—the idea that anyone could know enough to engineer society successfully. He was right to fret.

Hayek’s greatest contribution to economics was to show that society is far more complex than we realize, with little pieces of knowledge dispersed among millions of individuals. “The curious task of economics,” he famously wrote in “The Fatal Conceit,” which he published in 1988, “is to demonstrate to men how little they really know about what they imagine they can design.”

Recent government interventions suggest that politicians and bureaucrats today think they can design just about anything. This ignorance has backfired, as it always does, bringing with it what economists call “unintended consequences.”

Consider the Affordable Care Act. The law’s mandates, restrictions, prohibitions, taxes and subsidies are meant to make health insurance universally available. Yet since its passage in 2010, the proportion of Americans lacking health insurance has fallen only to 13% from 16%, according to a recent study by the Centers for Disease Control and Prevention. Millions of Americans have faced higher premiums, often losing their preferred doctors, contrary to what President Obama predicted and promised.

Thanks to the hastily written law’s incentives, ObamaCare also has been a drag on employment. About 18% of employers surveyed by the Federal Reserve Bank of Philadelphia in August said that the ACA caused them to reduce the number of workers they employ. Only 3% of employers credit the ACA with enabling them to hire more workers. Those who are being hired often find their workweek capped at 29 hours, not coincidentally just one hour less than the definition of “full time” under the ACA.

Or take the 2010 Dodd-Frank law, the financial reform legislation enacted after the 2008 meltdown. The law empowers the federal government to centrally manage the risks of the American financial system, as it seeks to prevent another crisis and eliminate the problem of too-big-to-fail banks. Yet large banks still reap a $70 billion annual subsidy from the continued market perception that they will be rescued if trouble arises, according to a March report from the International Monetary Fund.

Enter the unintended consequences. Dodd-Frank has created nearly 400 new regulations, slapping the industry with more than $20 billion in new compliance costs, according to research from the American Action Forum. Even worse, these regulations tend to fall more heavily on small banks that cannot absorb the new costs as easily as their giant rivals that were the supposed risks to the economy should they flounder.

In addition, many of Dodd-Frank’s costs are passed on to consumers in the form of higher bank fees and reduced bank services. Expensive bank fees then drive many consumers out of the mainstream financial system and into the arms of payday lenders. The Federal Deposit Insurance Corp. estimates that the number of “unbanked” consumers in America rose by one million from 2009 to 2011, while payday lending has boomed during the same period. That was not the plan.

Such hubris and its inevitable results would not have surprised Hayek. In the 1970s, he saw government policies create the inflation they were designed to avoid. Government has shown again and again the folly of efforts to centrally direct complex systems.

What does Hayek recommend? A little humility. “We shall not grow wiser before we learn that much that we have done was very foolish,” he wrote in his 1944 masterpiece, “The Road to Serfdom.” It was the book’s central lesson that hubris makes us not only poorer but also less free. Today’s leaders would be wise to become better students of the late Nobel laureate.

Mr. Boudreaux is professor of economics at George Mason University, where Mr. Zywicki is a professor of law. Both are senior fellows at the Mercatus Center’s Hayek Program for Advanced Study in Philosophy, Politics and Economics.

Saturday, October 4, 2014

George Will on Trickle Down Economics

http://www.breitbart.com/Breitbart-TV/2014/10/02/George%20Will-Obama-Is-Practicing-Trickle-Down-Economics