Bad economics can bring about or grow out of bad politics. But the question is, what are bad economics and bad politics?
Bad economics can bring about or grow out of bad politics. But the
question is, what are bad economics and bad politics? Unless this is
clearly and correctly identified, a bad situation can be made worse, and
a good situation can be turned into a bad one. So sorting this out is
crucial to having a free and prosperous society.
British economist, Robert Skidelsky, is confident that he knows the answer. In a recent article on “Good Politics, Bad Economics,” he
states that bad economics and bad politics are free markets and limited
government along classical liberal lines. How does he know that such
economics and politics are “bad” in their effects on the society? The
financial crisis of 2008-2009, Skidelsky says, was due to unbridled
financial markets combined with “hands-off” economic policies once the
downturn set in, in 2009-2010.
Good politics and good economics, in his view, comprise an openness
and sensitivity to the concerns of many in the society for social
securities and job assurances in a changing and uncertain world. Oh,
Adam Smith’s invisible hand of unhampered free markets is fine enough
when taking the long view, but, Skidelsky says, they are “also highly
disruptive and prone to periodic breakdown,” in the shorter run.
Skidelsky: Populist Demagogues as Good Economists
Adhering to such Smithian free market policies opens the door to
“populist” demagogues, such as Victor Orban in Hungary who has
instituted illiberal political policies attempting to restrict civil
liberties and personal freedom. But, on the other hand, as far as
Skidelsky is concerned Orban has a highly redeemable set of good fiscal
policies, based on a “sound Keynesian footing.”
This echoes back to the infamous forward that John Maynard Keynes (1883-1946) wrote for the German translation of his,
The General Theory of Employment, Interest, and Money (1936),
that “The theory of output as a whole, which is what the following book
purports to provide, is much more easily adapted to the conditions in a
totalitarian state than . . . under conditions of free competition and a
large measure of laissez-faire . . .”
It is worth recalling that in 1936, the only remaining academic
economists to whom the content of Keynes’s book could be addressed in
recommending it as a guide for government economic policy were Nazi
economists, since all others already had been removed from university
and related positions by Hitler’s National Socialist regime.
Following in the footsteps of his intellectual mentor (being the
author of a highly regarded three-volume biography of Keynes), Skidelsky
points out that illiberal nationalist regimes such as Orban’s find it
far easier “to pursue policies of social protection.” Why? They can use
the heavy hand of government control to impose such policies on society
without the type of resistance or public criticism possible in a more
politically open liberal system.
The Bigger the Government, the Better for Keynesians
The smaller the government’s fiscal presence in the economic
activities within a country, the less is likely to be the impact from
“activist” government spending policies, since government expenditures
and taxation would be relatively small to start with. If there is, say, a
$1 trillion economy, with government taxing and spending only
representing one percent (or $10 billion), a 20 percent increase in
government spending in the form of a budget deficit only comes to an
additional $2 billion.
But if, on the other hand, out of a $1 trillion economy, government
taxing and spending comes to, say, 20 percent that is equal to $200
billion. If, now, the government increases it’s spending by only 5
percent through deficit financing that comes to $10 billion, or five
times as much as in the first case.
Keynes’s point, and Skidelsky’s, is that the greater the degree of
government influence or control over the economic activities within a
country to begin with, including the size of government spending as a
percent of the economy as a whole, the larger the impact from any
increase in spending by that government. The bigger the government, the
more policy-relevant is the introduction or expansion of Keynesian-type
fiscal policies.
In fairness, Keynes had no sympathy for the ideology or the politics
of the Nazi regime in Germany, and Robert Skidelsky is equally
unsympathetic with the political and cultural policies of Orban’s
government in Hungary. But Skidelsky believes that the best way to
prevent or make less likely the coming to power of a populist,
“right-wing” government like Orban’s is for a more liberal and
democratic government to introduce “good” Keynesian and other
interventionist policies before economic circumstances become so bad in a
country that the citizens turn to an Orban-type of leader, due to the
affects of “bad” free market policies that limit the size and scope of a
government to “fix” and set things right.
Bastiat and Hazlitt: Good Economists Look Beyond the Short Run
Slightly modernizing the insight of the French free market economist,
Frederic Bastiat (1801-1850) in his famous essay, “What is Seen and
What is Not Seen,” economic journalist Henry Hazlitt (1894-1993)
explained the crucial difference between a “bad” and “good” economist
in his classic, Economics in One Lesson (1946):
“The bad economist sees only what immediately strikes the eye; the
good economist also looks beyond. The bad economist sees only the direct
consequences of a proposed course; the good economist looks also at the
longer and indirect consequences. The bad economist sees only what the
effect of a given policy has been or will be on one particular group,
the good economist inquires also what the effect of the policy will be
on all groups . . .
“The long-run consequences of some economic policies may become
evident in a few months. Others may not become evident for several
years. Still others may not become evident for decades. But in every
case those long-run consequences are contained in the policy as surely
as the hen was in the egg., the flower in the seed . . . The art of
economics consists in looking not merely at the immediate but at the
longer effects of any act or policy; it consists in tracing the
consequences not merely for one group but for all groups.”
Now no personal or moral slight is intended by implying that Robert
Skidelsky, by Bastiat’s and Hazlitt’s definition, is a “bad” economist.
It simply means that it is “bad economics” if the analyst, for whatever
reason, exclusively or primarily focuses on the immediate or nearer
effects from a government policy while ignoring or downplaying the
possible or likely impact of such policies when taking the longer-run
perspective on what the consequences of a policy may be.
The reason being, as the old adage says, “the road to hell is paved
with good intentions.” It is clear from Skidelsky’s argument that he is
concerned that if a “good” or well-intentioned government pursues “bad”
economic policies, it may create the political conditions in which an
authoritarian or populist demagogue may be able to promise “good”
interventionist economics, some of which he might even successfully
deliver, but at the cost of reduced or lost political and civil
liberties.
However,
a “good” diagnosis requires a correct judgment concerning the cause and
nature of the (social) ailment. Otherwise, the illness may be made
worse, or at a minimum recovery may be delayed or prolonged more than
otherwise might have been necessary.
Short-Run Policies Created the 2008-2009 Crisis
What Skidelsky interprets as the economic system prevailing in the
United States and most other Western countries has little to do with how
classical liberals define a “free market.” Financial markets have been
and are heavily regulated by government regulatory agencies. The
creation of money and credit and the rates of interest they charge to
borrowers are not truly market-based. Central banks set the regulatory
and loan-creating rules for the member banks within the banking systems.
Governments and their central banks created the financial crisis of
2008-2009. For years the Federal Reserve had been increasing the
quantity of loanable funds in the banking system, and when adjusted for
price inflation as measured by the consumer price index, some real
interest rates were negative. (See my article, “Interest Rates Need to Tell the Truth”.)
In other words, loan money was being handed out for free in terms of
real buying power that a borrower was paying back to lenders for the
period of their loans. To get the central bank-created money in the
banking system out the door, besides the equivalent of negative interest
charges on some loans, the banks were induced to extend loans to
uncredit-worthy home buyers with the promise that government agencies
like Fanny Mae Freddie Mac would pick up the tab if and when the loans
went bad – which many eventually did.
Bad Economics and Short-Run Politics Cause Society’s Ills
What had motivated these policies? In the case of the Federal
Reserve, a fear in the early years of the 21st century that there might
be a tendency for price deflation, which the Fed Board of Governors
decided had to be prevented at all costs through counter-acting monetary
expansion. The longer run consequence was an unsustainable financial
and investment bubble that came crashing down in 2008-2009. (See my
article, “Don’t Fear ‘Deflation,’ Unless Caused by Government”.)
In the case of the housing market, pressures by members of Congress
were placed on the government’s home loan guaranteed agencies – Fannie
Mae and Freddie Mac – that not enough people were attaining the American
dream of having their own home, especially among members of minority
communities in the United States. So credit standards were lowered or
seemingly almost waved. Banks were told not to worry; just extend home
loans to those not meeting the traditional credit-worthy standards of
income and work history or not enough of a usual down payment, because
if things went wrong those government agencies guaranteed to cover any
that went “bad.”
Misplaced fears about possible price deflation and the pressures of
politicians looking no further than needing votes from happy home-owning
constituents; these were the short-run policy contexts that created the
longer run disaster of one of the severest economic downturns of the
post-World War II period.
Macroeconomic Mindset Prevents Understanding of Markets
Both factors reflected the bad economics of focusing on the
short-run. The Keynesian mindset is to have the monetary central
planners try to micro-manage every twist and turn in the financial and
economic climate, and frequently turn the money-creation and interest
rate dials in an attempt to keep the macro-economy on an even keel, as
the defined by the Keynesian-oriented policy makers.
The same applies to using government taxing and spending to try to
influence investment, employment and wages in the economy as a whole.
But, again, what this mindset summarizes away in the macroeconomic
aggregates used as indicators and targets are the complex and
interconnected microeconomic relationships in the structure of relative
prices and wages, relative profitabilities of directing productions to
satisfy multitudes of different consumer demands, and the need for
on-going and continuous adaptations and adjustments in prices and wages,
and the allocation of resources (including labor) for successful
economy-wide coordination of what everyone is doing in the social system
of the division of labor. (See my article, “Macro Aggregates Hide the Real Market Processes at Work”.)
The Best Short and Long Run Policy: Limited Government
For a market economy to succeed in this endeavor the only long run
set of policies for any government needs to undertake is to protect the
individual and private property rights of the citizenry, enforce all
contracts and agreements peacefully and voluntarily entered into that
are not fraudulent or misrepresentations, and prevent foreign aggressors
from invading and plundering the people within a country.
This represents the “good politics” of a (classical) liberal
political order that helps secure people’s liberty and assures the
economic setting most conducive to prosperity and price-guided market
coordination. A stable and healthy market order such as this precludes
the likelihood of the disruptions and distortions that are central to
Skildelsky’s concerns.
If such disruptions do arise for some external reason, it remains
nonetheless the best long run and short run policy for open and
competitive markets to be left free to rebalance and recoordinate in the
most appropriate and timesaving ways possible. Government planners,
regulators and bureaucrats can never know or acquire the needed and
necessary microeconomic knowledge of time and circumstance that only the
actors within the various sectors of the economy can discover and
attempt to utilize in the most effective manner.
Following this type of economic policy approach is most likely to
preclude the emergence and attractiveness of the populist demagogues
that Skidelsky fears as threats to political freedom and civil
liberties. His proposed policies are far more likely to bring about the
very “bad politics” about which he is rightly concerned.
[Originally Published at the American Institute for Economic Research]
Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. Full Bio
rebeling@citadel.edu
