Tried and Failed Policies Resurfacing as Stimulus

(Cross-posted in part at Heritage)

The “cash for clunkers” plan recently proposed in Congress would provide subsidy for a new car purchase to anyone willing to have their current car destroyed. But the economic rationale is eerily similar to the New Deal program most widely agreed to be a catastrophic failure: his agriculture plan that slaughtered pigs. The reasoning goes like this:

Crushing the old car has two benefits. First, it ensures that the consumer's purchase of a more efficient vehicle actually has a net environmental benefit. Second, it prevents a glut of used cars on the market, which would reduce trade-in values for new car buyers, which would cut into the sales incentive effect.

This was the same misguided reasoning that led to the slaughter of six million pigs and plowing under of about half the crop area under cultivation. The head of the Agricultural Adjustment Administration argued that:

People who believe that we ordered the destruction of food are merely the victims of their prejudices and the misinformation that has been fed to them by interested persons. What we actually did was to stop the destruction of foodstuffs by making it worth while for farmers to sell them rather than to destroy them.

In other words, the destruction of crops and livestock would ultimately lead to less waste because prices would be lifted, and so farmers would have more incentive to produce. However, despite vigorous defense by the administration, it is now known that most of the meat went to waste and it was an abysmal failure. Government cannot do a better job than the market in setting prices, and government’s destruction of output will never lead to increased output. It was a failure of economic reasoning – which is now coming back in vogue.

Another failed policy being considered is the mandate to buy American:

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

This policy is almost precisely the one put into force during the period of railroad subsidies. According to The Myth of The Robber Barons, transcontinental railroads receiving subsidies had charters that required they only buy American-made steel. But American rails, made with American steel, were of lesser quality than some foreign brands, and this drove their maintenance costs up. This was one of many reasons why subsidized railroads performed extremely poorly compared to private ones.

Yet, here we are again using subsidies that distort incentives, and adding to the problem by passing mandates that will drive up costs and produce inferior products. This new “hope and change” we’re seeing is simply a return to the failed economic reasoning of the New Deal.

The Golden Age of Political Entrepreneurship is Here

(Cross-posted at Heritage)

As Joel Kotkin detailed in the Washington Post this weekend, the Wall Street Bailout and Trillion Dollar Deficit Plan being pushed through Congress this month mark the transfer of power from commercial cities like Chicago, New York, and San Francisco, to Washington DC.

In the business world, campaign contributions and lobbying efforts have replaced cost cutting as the way to maximize profit. Going to Washington with hands outstretched can prevent bankruptcy, and can provide a stimulus to the bottom line. Competing without such government aid is becoming more and more difficult, and rebels who shun such tactics are a dying breed.

This “political entrepreneurship,” or use of political power in place of competition, is not new. In fact, as far back as the “robber baron” age, some businesses preferred to use the power and purse of Congress, rather than have to do the hard work of cost cutting and innovation necessary to be a successful market entrepreneur. The true “robber barons” were not businessmen competing freely in the market, but those businessmen who gained monopoly advantage by lobbying Congress and buying market power.

Today, we still have some “robber barons,” protected by government and producing shoddy products, but we also have endless more miles of red tape on regular business, an incomprehensible tax code with favors for special interests, and subsidies and “pork” for every conceivable interest group request. It. Yet with all this spending and protection, we’re told we need more “stimulus,” and we need to “protect” more jobs.

In the academic world, two developments are driving the movement from economics to politics. The all-round analysis of economics, which can take into account all interactions and effects of various policies, has been abandoned for narrow subtopics and mathematical abstractions. Meanwhile the economists themselves have taken political views and ignored economics in their policy recommendations (for example, Paul Krugman).

But, the movement away from rational and realistic economics – the realization that there are limited resources and limited time, and that we cannot at once waste time digging holes and filling them up again, and also be productive and create prosperity – and toward politics – the art of deception, favoritism and trading favors – will necessarily bankrupt the country.

Obama Invokes Keynes and FDR, and Promises a Return to Central Planning

(Cross-posted at Heritage)

While he spoke about moving forward, and promised change as we look toward the future, in fact President Obama’s inaugural address was firmly entrenched in discredited policies of the past; policies that never worked.

For example:

Now, there are some who question the scale of our ambitions — who suggest that our system cannot tolerate too many big plans. Their memories are short. For they have forgotten what this country has already done; what free men and women can achieve when imagination is joined to common purpose, and necessity to courage.

His words here are very reminiscent of Roosevelt’s words at the start of the Great Depression. But, our memories are indeed short, if we forget that Roosevelt’s plans were actually huge failures.

Next, Obama invokes J. M. Keynes to support his call to planning, once again invoking a discredited idea from the past:

What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works — whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified.

Keynes argued that the inefficiency of government spending compared with private spending did not apply during periods of recession. He reasoned that when the economy was not at full-employment (i.e. during a recession) government was “better than nothing.” Government could inject the economy with money, by borrowing and spending it, and put the unemployed to work.

Of course, even if borrowing is helpful during these periods, it could still be spent privately (with tax cuts). So, Keynes had to argue that tax cuts are too slow, and that people saving the money, as they might do when given a tax cut, is not as good as government spending the money. However, Keynesian theories have not been supported by reality, and his proofs have long ago been abandoned by economists. Yet, Obama is embracing this new trend toward the past.

Finally, Obama promises that the programs that work will remain and those that fail will be discontinued: “Where the answer is yes, we intend to move forward. Where the answer is no, programs will end.”

Supposedly, this is a major difference from the past – when, apparently, government cared less about whether the programs were working. Of course, it is rare that a government program is ever ended. As Reagan put it, “There is nothing more permanent than a temporary government program.” It is also impossible to know whether a program is “stimulating the economy.” Those that benefit from them can make this known to all, but those that suffer cannot know or prove that it is the program that makes them suffer: the damage is indirect because it caused by high taxes, the crowd-out of private business, and so on. So, a true cost-benefit analysis of any given program is impossible.

Obama has promised nothing more than a return to the 1930s; to the old discredited economic theories and the old discredited policies of central planning.

Conversation on Poverty

An old friend, James, who helped train me in Perl many years ago, recently came to me with a request: he wants to work on the problem of poverty, internationally and domestically, from a new perspective. His belief is that, rather than throwing money at the problem in the form of welfare or foreign aid, the development of personal micro-level capability is required. In the inner city, this means responsibility, inner peace in place of negative influence, and opportunity. Internationally, it means the tools of exchange and opportunity, and the ability to direct entrepreneurial drive into productive pursuits.

This is clearly the direction that programs are headed, though slowly. Welfare programs have been reformed toward these ends, and development economics has moved from supporting foreign aid in the form of blank checks, to building institutions; micro-loans and in-kind support for education have replaced cash that went directly to support dictators. But many of the new programs have been twisted to produce outcomes similar to the old programs, and poverty is still a major problem.

My friend came to me because I work at the Heritage Foundation, and he felt that the loudspeaker that Heritage possesses on the policy stage might serve this issue well. The idea is to build a bridge between the left-wing "peacemaking" groups, the right-wing responsibility advocates and the libertarian anti-state-programs people.

James says he hopes to understand the impact, if any, of wide-spread training in constructive conflict resolution and other proven-effective peace-building techniques. His hypothesis is that educating people to effectively cultivate peace in their lives and relationships will at worst make them more productive and save the rest of us a lot of money, and at best, result in a more secure world. He can advocate for policy in various left-wing peacemaking communities, while I can advocate among the "rightwing" such as Heritage, and the libertarian community and academia.

I pointed James to Pete Leeson's excellent lecture for FEE on development. He enjoyed it a lot and wrote the following email in reply. The email below, although it is just some rambling thoughts, brings up so many important questions and ideas that touch on so many of the issues that George Mason economists, in particular, are working on, that I was inspired to share it and invite thoughts from the best minds I know. Please share your reactions, questions, apprehensions, and references to relevant studies. Let's get a conversation going, and see what we can come up with. I've spoken to a couple of people at Heritage, and if we can come up with something, they may be on board.

I recommend listening to Pete's lecture if you aren't familiar with his take on development economics, as it is a great starting point for this conversation. This is what James is referring to in the email.

First, this is so interesting for me! I'm so pleased to be able to learn this stuff - thanks so much for sharing your knowledge! I have a ton of questions...

I was impressed with the talk, of course. There's a lot to learn there, and I'm sure that a lot or all of it holds water, but I keep thinking that it's all well and good, but it doesn't seem to take into account certain significant realities...

I whole-heartedly agree with the self-interested actor model here, just looking at it from a different perspective. The self-interest of the most powerful actors is likely the cause for the state of the world - or is that a tautology?

I'm under the impression that the US government, through covert means, has been intentionally undermining the well-being of poor, resource-rich countries for the last 50 years - whenever and wherever they can - in order to amass power and wealth for US corporations (link). I wonder if there's any discussion of that - or what is the understanding of that - within Heritage? Were those actions taken to shore up private property rights for the citizens of those countries, or so that we could own everything and they could remain in abject poverty? It's going to be a long wait indeed before the populations of these countries create good institutions if they're constantly being torn down by such well-funded and organized outside forces.

One form of aid that strikes me as the logical next step after hearing the talk is: we should send people in to teach all developing peoples about the benefits of private property rights... it couldn't result in any corruption and would cause the population to create their own enlightened institutions. What do you think?

One other thing I'm interested in is this: my understanding is that economists in general start with the idea that people are motivated by a need to be useful - so people want to produce more or something like that in order to be more useful. This belief - I understand - leads to measures such as GDP, which measure cash value but not other resource or human happiness. I'm more of the opinion that people are motivated by a desire to be happy, to have no problems. When people are not very good at taking care of themselves, they seek to enrich themselves but after people get good at taking care of themselves, which often includes having some stable means of self-support, they start to look to take care of other people (people are always surrounded by problems - first their own, and then others'). There are some economic thinkers who've come up with measures which try to take this kind of thinking into account - the Genuine Progress Indicator is one example. Do you know anything about this? I'd love to hear your reactions to these kinds of things.

When I look around, a lot of people are working awfully hard to cultivate happiness. Yet, given all the effort expended, there doesn't seem to be the abundance in terms of human happiness that I would have thought. We have so many technological marvels, so much infrastructure, we know so much about the universe and the world, and yet people don't seem to be much better off for it in terms of either individuals' own ease and inner peace, or peace between people either domestically or internationally. I know that significant progress can be made to achieving genuine long-term happiness if we apply ourselves, but it seems that not enough resources have been devoted to making this a reality. That's what I'm talking about, not aid. I'm talking about finding out what's the best way to cultivate peace for everyone, and teaching people so they can become engines of peace in their lives and communities.

Thanks again - this is fascinating for me. I'm sure that I'm asking a few stupid questions here. After all, I'm a pre-econ 101 person. I'll browse fee.org... I wonder if there's anywhere you might point me to get a basic education?

Those are just some thoughts and questions that James had, he will join us in the comments. Note that he brought up some very interesting, I think, theoretical questions, practical questions, and ideas. He is very open minded, I hope you will join him in this good spirit. Please make use of the open comments.

Update: On a related note, I may be working with the "Protecting American Sovereignty" group at Heritage on their initiative to prevent the movement toward One World Government, or toward world governance (international regulatory regimes), through advocating freer markets and freer trade instead, to combat global financial unease. Because security, as well as economic security, is of great concern to them, terrorism is a major issue for them. For this reason, development and combating poverty through institution-building and trade also fit into that program. Perhaps this could be one way of bringing this initiative to Heritage.

What Socialists Mean by Capitalism

I'm currently reading Le Grand and Estrin's book Market Socialism.

I have often complained that socialists misunderstand the market. Sometimes they do. Sometimes they understand it better than most conventional economists. Sometimes the most hard core Marxist will come so close to understanding the libertarian view - like Bukharin for instance.

Le Grand and Estrin did seem to understand markets in the introduction - at least as well as many "mainstream" economists.

Then an amazing passage occurred.

In this passage, these proponents of Market Socialism revealed that they distinguished "capitalism" from "liberalism" -- their use of "capitalism" was not synonymous with markets, but was distinguished from laissez-faire free market libertarianism. They still preferred market socialism to liberalism, but the complaints against capitalism are not complaints against free markets per se, but against a certain form of market system, which they call capitalism, but which arguably is really corporatism or crony capitalism.

Capitalism places the economic power in the hands of capital and its owners. Traditional socialism gives power exclusively to labour: the dictatorship of the proletariat, preferably exercised through a centralized authority. And the "New Right"--actually better characterized as traditional liberalism-- claims to locate power in the hands of the individual--particularly the individual citizen and consumer.

This is very interesting. Of course, I have argued this and heard whiff of this in socialist literature before, when they argue that the "ideal" of free markets is not possible, that concentration is delivering power into a few hands (a la Bukharin & Lenin, based on Marx), and so on, implying that it would be different if free markets did exist. Similarly, Lange's market socialist model was based on the use of state power to create a perfect market-- implying that if markets were less monopolized then they would be OK. But this is still a unique passage. Given this characterization,

In the following, replace "capitalism" with "corporatism" in your mind. It continues a bit below:

Full blooded capitalism is unattractive because it exploits labour through its monopoly of employment and because it exploits consumers through monopolizing goods markets. Traditional socialism expropriates capital and subordinates the interests of consumers to the interests of the workers. Indeed, with its penchant for centralization, it is far from clear that even the workers are properly taken care of. Liberalism puts people's livelihoods and their savings at the mercy of consumer taste and fashion; its emphasis on the narrow rights of individuals jeopardizes the collective activities of the community and hence the community itself.

What is needed is a model of society where power is more evenly distributed between these groups; where the interests of owners of capital, of workers, and of consumers are all taken into account with none taking automatic priority.

This struck me as fascinating. Now, I don't personally see how the group which liberalism represents - everyone - needs to be supplemented with the groups favored in corporatism and in socialism, which are partial. Nor that the interests of some "community" of individuals must be represented. In a free market (liberalism) such a group can form and defend itself, since all the individuals are protected by the system. But, the authors seem to believe that protection of each person, without protection of groups, leads to a loss of community-ness. Perhaps.

The fact that socialists have directed their main fight against corporatism this whole time and not against the free market is a critical point that we would do well to remember - and to make clear the distinction as often as possible. We have hardly tasted true liberalism, and socialists have tended not to start with models. In general, they, being people sympathetic to socialism and hence a softer sort of person, saw injustices in the world and began there. Seeing injustices, and seeing the market used by those with power and money, they blamed capitalists and they blamed the market. They did analyze different kinds of market societies, but they threaded them together in a dialectical historical account.

Market socialists are able to distinguish corporatism from liberalism. Starting there, the arguments are much easier to defeat. As above, sometimes it just boils down to "with liberalism, you lose the sense of community." There are some good books on how that isn't the case - that the opposite is true. When the state encroaches, as through welfare programs, it replaces community. In fact, the authors themselves cite "protection from the family" as a key feature of the welfare state (p. 21).

I'll post more on this book, maybe later today even.

update: I forgot to mention: Marxists describe the "crises" of centralizing capitalism, the movement from more to less competition, and consolidation into fewer hands. If capitalism is seen as rent-seeking driven corporatism, this makes sense. As rent-seeking drives policy, it necessarily does concentrate power into fewer hands, and also creates recurring crises (business cycles). As an example, consider how fixhousingfirst.com is calling for new increased low-income housing policies for its constituency, despite the fact that it was likely these policies which drove the housing bubble and caused the current crisis.

Update 2: I will also post more on this another time-- I would like to consider Marx and Bukharin's arguments in particular against "capitalism" as they may be estimated from a public choice perspective, as against corporatism (or mercantilism). It is possible that some Austrians have already done this - as it seems many Austrians see that Marx was really arguing against crony capitalism and not free markets - but probably not enough.

Then this can be tied together with the later market socialism literature and analysis. Marx was wrong with his labor theory of value, but perhaps right with his concentration, crises and ultimate end in planning (if he was studying the rent-seeking society); market socialists like Lange were wrong with their perfect competition models, but right in some of their understandings of the benefit of prices and competition. Very recent market socialists (like those above, and like Stiglitz) have greater understanding of many of the Austrian points than conventional economists. Perhaps bringing together all the good understandings of these various socialists could be useful in contributing to new, better models, and to a greater understanding of interventionism.