I still don't understand what Obama has done to "kill" job creation. What do you suggest? Are we back to the healthcare and tax thing?
Dear John
The government cannot grow jobs. It can only kill them. This is not a dogmatic statement. It is a statement supported by the hard science of far from equilibrium natural systems. If that statement makes your eyes roll, dont' worry i won't mention far from equilibrium systems again ... until the very end of this email.
I just want to make it clear that my ideas are based on principles and natural laws of the hard sciences (like physics, chemistry, biology); they aren't some mess of ideas i just threw together from my imagination (which is the case for most of the social sciences, including what JM Keynes did and what modern establishment economists and progressives continue to do).
Every successful economic reform program I have seen in 12 years studying emerging markets have been measures aimed at reducing government intervention in markets! The more the public sector pulls out of the economy and reduces its footprint, the more dynamic the economy becomes.
By contrast, efforts to fix developed markets by introducing new government measures undermines market dynamism. Thus it is paradoxically true the economic reforms entailing new government initiatives are counter productive while economic reforms that reduce footprint of government on economy are positively self reinforcing in terms of generating economic growth and dynamism.
A typical economic development pattern for a poor country is as follows: in the earliest stage, the government controls most of the economy. growth is stagnant. The government decides it wants to improve growth (and tax collection) so it reluctantly (or sometimes boldly) “opens up” the economy. Consider China's major rural land liberalization in 1979, followed by several other major market openings over the next 25-30 years. What follows from such "opening" is an economic boom. people start to get wealthy. government tax receipts and power increases.
Liberalization creates more wealth and creates incentive for more liberalizations in a positive self reinforinc cycle. At this stage, there are going to be some early powerful industrialists and bankers who decide that they want to protect the wealth they have accumulated. Government also wants to protect its position in order to maximize potential rent seeking activities.
During this opening up phase, the economy successfully launches into a sustained period of sustained high growth. When this happens, certain market failures seem to emerge, such as growing income inequality, boom - bust cycles in economy and pollution.
What follows is a gradual unwinding of the free market orientation that created the boom in the first place. Government interventions are justified as necessary developments to fix market failures. WHat these interventions really do is ensure that the haves in society (those in the big govt - business nexus) are protected from the perils of the natural creative destruction of the market place. This is what i call the "pulling up the ladders" phase. those who have climbed the wealth ladder via markets turn around and blame the markets for various failures (modern example is Bill Gates and . The big biz / big govt nexus create justifications for introducing regulations and rules that are sold as solutions to market failures or way to improve social outcomes that are really and truly cycnical measures aimed at protecting incumbant business / big govt interests.
One of the key early interventions that the big biz/ big finance nexus introduces is central banking.
central banking provides a key bailout mechanism for banks who would otherwise fail in a business cycle if they pursued wreckless lending policy previously.
this is how the Federal reserve was sold by a conspiracy of big govt / big finance in early 1900's. The Fed was successfully sold as way to reduce business cycles and the harm they did to poor households. it is no small irony that it was only after the Fed was created that we got the Great Depression!!! So much for central banks helping the little guy!!! After the Federal Reserve fueled the easy money boom that led to the Great Depression, the big govt / big biz nexus blamed the market for the failing -- even though the Fed induced boom was the underlying cause of the bust. The accepted mainstream narrative of the Great Depression (promoted by none other than Ben Bernanke) has it that the Fed made a mistake after the bust. the boom was blamed on greed and poor regulation in the 1930s and 40s and central banks continued to be viewed as guarantors of the public good. The reality is that Central banks bailout politically connected bankers. that is what they do! over time, central banks create moral hazzard and encourage and sow systemic risk in the whole financial sector.
once in a while a big bank will be left out to dry (Lehman) just to prove that big government isn't in cahoots with the banks.
Typically, when an economic boom really takes off in a developing economy (such as China over the past 15 years or the US in the 1920s) productivity in the economy surges from say 2% growth to 4 or 6 or even 8%. What this does is put downward pressure on “inflation.” With productivity booming and industry able to produce stuff at cheaper prices (most countries during this stage have rapid urbanization which is a massive boom to productivity as rural workers are much less productive than urban workers). With prices falling, the central bank comes in and lowers interest rates to promote higher growth in order to prevent so called deflation. What results is a historic boom and bust cycle as we saw in 1920s to Great Depression and what we saw in China (and the world from 2003 to 2008), and that still hasn’t played out fully in China and the world economy.
When the boom inevitably goes to bust, the public begs government to come in and “fix” things, and the big bankers and industrialists are delighted because they love to have government bailouts and handouts. HOWEVER, the more the government does to fix things, the worse things get for the general public.
Finally, people get sick of government promises and public support shifts from govt solutions to less govt. After this shift, the market and economy starts a new round of sustainable growth.
The US economy double dipped in 1937 and unemployment was double digits in the early 1940s. it was only when the GOP got a majority in congress in the 1938 congressional elections and started to unwind FDRs NEw Deal did the US economy start to right itself -- and position for great post WWII expansion of 50s and 60s.
when a developing economy has experienced some decades of sustained growth after its intitial launching (due to government de-regulation), there are going to be major industrial and government players who become powerful. powerful government officials look to ways they can ensure their continued stay in government in order to ensure access to rent seeking opportunities.
at this point is it very likley that big government will promise entitlement programs. they can do this -- maybe even with good intensions -- because they see high growth and project it out into the foreseeable future. high tax revenues are projected based on these rosy economic projections. Increased fiscal promises encourage easy monetary policy from the central bank. Easy money policies pursued by central bank (as we saw in US in the 2000s) depresses underlying productivity growth in the economy, growth slows and suddenly what seemed to be affordable public programs are no longer affordable any more.
AT this point, developed countries face an unsustainable fiscal reckoning of some form or fashion. This is where we are in the development cycle in the Western world.
Again, all of the successful reform programs I have seen in the early stages of EM development entail the reduction of government intervention in the economy and financial markets. This includes privatization of previously state owned companies, the liberalization of interest rates, the elimination of state monopolies in the telecom sector, the reduction of onerous regulations on foreign investment and ownership in domestic industry, development of Special economic zones, etc. etc. etc. the phrase "economic reform" sounds like this is a plan made up of activist interventions by the government introducing new programs aimed at fixing the economy and/or injecting new dynamism. In fact, "economic reform" (when it works) invariably really means the unwinding some previously well intended but self defeating government intervention in the economy!!!!
I have never seen successful “reform” come in the form of new actively interventionist measures to fix markets by introducing new regulations or laws or public programs (infrastructure, education, energy, entitlements, etc) that increase the scope of government involvement in the economy or financial markets!!!
Everything Obama has done has been about “fixing” what is supposedly broken in the free market. this is totally upside down thinking and leads to couter productive results – as we have seen in the last two to three years.
Obama’s grand plan was a New Foundation concept that he introduced in April 2009. This entailed government fixing infrastructure, health care, education, green energy and intrducing new regs for financial market etc – all aimed at setting the economy on a more sustainable and healthier path.
This is pie in the sky utopian fantasy land wishful thinking that doesn’t work in the real world.
The underlying cause of the latest (not last) boom - bust and greed cycle on Wall Street (2001 to 2008) was caused by a toxic combination of insidious government interventions including an easy money bubble facilitated by the Federal Reserve and pro-housing policy implemented starting with Carter (community reinvestment act) and then redoubled by Clinton and GW (both of whom aimed to increase home ownership via well intended govt policy and institutions e.g. Fannie/Freddie).
we are supposed to believe that the answer to failed government policy is to double down on more government policy. To assume the market failed and the government can fix it is wishful, magical thinking. IF the govt could provide win/win solutions for society and the economy, then we would see progressively better results for countries with more and more intervention in the economy.
this is exactly the opposite of waht we see in the real world. Temporary successful results of activist governmetn always show fundamental weakness over time as is the case with Japan over the last 20 years after everyone thought Japan's industrial policy would make it most powerful economy in world in the 1980s, and is the case today with respect to China. "everyone" thinks China's wise policy makers will ensure China is #1 economy in coming decades. China will be the latest example of how central planning and govt intervention is ultimately self destructive to an eocnomy and to social well being.
liberals say that conservatives are hopelessly dogmatic about the benefits of free markets and reduced government intervention. liberals claim we live in the real world and in the real world markets aren’t perfect. since marekts arent' perfect, we as intelligent humans have a right and responsibility to fix them as best we can. even if our fixes aren't perfect, we still have to try. to sit back and not do anything would be suicidal and immoral in the face of imperfect markets.
It is true that markets aren’t perfect. but it is totally false that “we” can improve upon the best that markets can do!
Try to “fix” market failures and you will make things worse. This isn’t dogmatism, it is hard scientific fact based on the law of unintended consequences.
The law of unintended consequences isn’t something I just pulled out of thin air. It is a result of ironclad laws of nature that control the behavior of complex far from equilibrium systems. (there i go again with the natural systems lingo.)
that is the last of the scientific lingo .... the point is ... If you start with the premise that the economy is artificial and man-made, then you will never be able to see what I am talking about.
There is no way for government to create jobs or introduce measures that level the playing field or reduces income inequality or creates a green energy industry or fixes education for the masses or introduces a practical public health care system (that doesn’t bankrupt the state sooner or later – as we are seeing in Europe).
a flawed market based on free exchange and reciprocal respect for private property rights is the best we can do. adding government fixes to the flawed world we live in is a recipe for economic, social and cultural impoverishment NOT improvement. to think otherwise is the basic sort of hubris the greeks warned us about 2000 years ago. it is ironic that the new progressives shun religion yet they must believe that man is like god on earth, that he can shape society in the way he so desires. THat is like thinking man could redesign the earth (which is also a far from equilibrium natural system just like the human economy) so we didn't have earthquakes and other natural disasters. Man can play god in little ways, like by making iphones and skyscrapers or landing a man on the moon. But man cannot play god when it comes to planning, engineering or controlling complex natural systems like the human eocnomy or financial markets. that is because natural complex systems (like human economy and the larger earth system) defy human modelling and intervention.
someday i plan to articulate the assertions i have made above in the precise language of the hard sciences. if i am successful, you won't be able to dismiss me as a dogmatic lunatic!
the german philsopher Arthur schopenhauer said something like this: every new truth goes through 3 stages before it is recognized -- first it is ridiculed, second it is opposed and third it is viewed as self evident. we are in the ridicule phase of applying the science of complex systems to the economy.
someday i hope to live through the next two stages.... the leading thinkers and scientists will weigh in and if they don't find flaws in my project, then i will eventually facilitate a Copernican revolution in the way we think of mans relationship to nature and the economy. Currently we think about man as being the central actor or creator of the economy. I want to take man out of the center of the economy and show that rather than the active designer of the economy and society, that instead the economy and society is a function of human action and exchange and division of labor, but not of human design.
progressives will have to radically change their claims about government introducing win/win solutions or fixes for markets. They will have to talk in a language of trade-offs. progressive government won't be able to claim, let us do this or that and we'll improve the greater good for the greater part of society. Now progressives claim that anything they do to improve the economy is win/win for society as a whole. My project will prove that human interventions cannot improve or ensure or guarantee macro outcomes, including such progressive goals as: "leveling the playing field", providing living wage for all, free education, universal health care, reducing business cycles, developing green energy economy, etc etc etc.
conservatives will also not be able to make erroneous claims about how markets are the natural fix to all social problems. Certain problems will be shown to be natural features of the market, not problems. this includes income inequality. there is a natural distribution of income inequality that must emerge in a dynamic economy and that we need to understand is not "fixable." if income inequality gets beyond a natural distribution, we will see the cause as being well intended governmetn intervention, NOT natural flaws in markets that are fixable by public policy.
progressives will have to admit that anything they do can do good for only special interests and that whatever good goes to the special interest, there is a cost for society as a whole. the question will be: are we willing to pay the cost to help some at the expense of others? A follow up question will be this: are policies aimed at helping a group also causing second or third round effects that over time actually hurt the very group for which the help is aimed?? There will be no basis to claim that whoever doesn't agree with the many well intended government plans and proposals to fix social ills is selfish or unsophisticated or evil or part of a business conspiracy.
The question when markets ostensibly fail will be twofold:
1. we will ask if the so called failure is really a natural feature of the market and can't be fixed. an example is income inequality or business cycles or industrial pollution / accidents. or...
2,, we will ask if the "failure" is really a result of some previous well intended government intervention. a perfect example here is the historic easy money and easy credit fueled boom / bust cycle such as the Great Depression which seems to be a market failure but really is a result of central bank money printing.
The ultimate solution to any so called market failure will have to be an unwinding of some previous government intervention. the solution can't be to add more government to the equation lest that new solution create a cycle of unitended and unseen consequences that results in more so called market failures.
No comments:
Post a Comment