"Over-extended
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- Economist.com | NEW YORK
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- Fiscal policy
WHEN asked my assessment of the government's handling of the financial crisis, I usually say it is too soon to tell. But I am very concerned it is doing too much, too soon and too fast. Their current agenda (not even an exhaustive list): fix financial markets, boost aggregate demand, set up a new regulatory framework, decide how much bankers should be paid, create a market for green technology, repair infrastructure, repair schools, and fix entitlements. That would be ambitious for God to achieve, even given eight days, let alone mere mortals.
Despite the ambitious agenda, the Treasury remains understaffed. Richard Posner reckons that may not be the worst thing.
Obama is extremely able and self-confident and has appointed on the whole very able people to his staff and to the departments; some of them are brilliant. But the capacity of brilliant people, appointed to high positions in the federal government from outside, to screw up is legendary. The danger is amplified when the government tries to do too much. The economist Frank Knight used to quip that although production beyond capacity is a contradiction in terms, it is observed every day in academia—to which we can add, in the U.S. government as well. There is danger that the government is trying to do too much and that the economic consequences will be negative and serious.
The administration seems to suffer from the belief that government can do better by taking control and managing everything. For example, on health care there appears to be a belief that the White House can cut costs and expand coverage. The details of its plans remain uncertain, though the libertarian in me is instinctively sceptical. Health-care spending can surely be more efficient, but it has gotten wasteful because of thick layers of perverse incentives. Lowering costs and delivering effective health care to more people requires re-evaluating what health care is meant to provide. If there was potential for effective cost control from the top, the industry would have reaped the benefits already.
The last thing the American economy needs are more rules and bureaucracy. It needs thoughtful and creative approaches to health care, financial regulation, and taxation. Rather than expanding the scope of government and adding new rules, it would be more productive to set up the right incentives to illicit better behaviour. Getting that right is not a trivial task. Solving any one of the problems on the government's to-do list would be a tremendous achievement, but it seems doing too much at once runs the risk of getting things very wrong."
Me:Don the libertarian Democrat wrote:
"The intellectual climate at Chicago had been wholly different. My teachers... blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the need to let deflation and bankruptcy run their course, they issued repeated pronunciamentos calling for governmental action to stem the deflation-as J. Rennie Davis put it, "Frank H. Knight, Henry Simons, Jacob Viner, and their Chicago colleagues argued throughout the early 1930's for the use of large and continuous deficit budgets to combat the mass unemployment and deflation of the times" (Davis 1968, p. 476). They recommended also "that the Federal Reserve banks systematically pursue open-market operations with the double aim of facilitating necessary government financing aind increasing the liquidity of the banking structure" (Wright 1932, p. 162).... Keynes had nothing to offer those of us who had sat at the feet of Simons, Mints, Knight, and Viner.
It was this view of the quantity theory that I referred to in my "Restatement" as "a more subtle and relevant version, one in which the quantity theory was connected and integrated with general price theory and became a flexible and sensitive tool for interpreting movements in aggregate economic activity and for developing relevant policy prescriptions" (Friedman 1969, p. 52). I do not claim that this more hopeful and "relevant" view was restricted to Chicago. The manifesto from which I have quoted the recommendation for open-market operations was issued at the Harris Foundation lectures held at the University of Chicago in January 1932 and was signed by twelve University of Chicago economists. But there were twelve other signers (including Irving Fisher of Yale, Alvin Hansen of Minnesota, and John H. Williams of Harvard) from nine other institutions.'..."
Milton Friedman via Brad De Long.
Now, I'm amazed that my heroes keep getting quoted, and yet none of their ideas about particular policies seem to matter. As Friedman says, Knight supported a stimulus and QE, and, in fact, they reinforced each other. That's my view. I'm also for Narrow Banking, as was he. My view of this whole crisis comes from Fisher, who also backed these policies. They considered letting Debt-Defaltion run its course to be a very bad idea, as near as I can tell.
As for Hayek, he's a hero of mine as well. I agree with him here:
"There is no reason why in a society which has reached the general level of wealth which ours has attained . . . security against severe physical privation the certainty of a given minimum of sustenance . . . should not be guaranteed to all without endangering general freedom. . . . There can be nodoubt that some minimum of food, shelter and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody."
He seems to have changed his mind, but I still find his position here copacetic. This was Milton Friedman's view, and mine as well. It's called a Guaranteed Income.
"But the capacity of brilliant people, appointed to high positions in the federal government from outside, to screw up is legendary. "
The capacity to screw up is about as general an observation about human beings that I can come up with. As Wilde said:
"The world is a stage, but the play is badly cast"
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