For its 125th anniversary issue, the WSJ asked "If you could propose one change in American policy, society or culture to revive prosperity and self-confidence, what would it be and why?" Oh, and you have 250 words. I asked my son what to do. He answered quickly, "wish for more wishes." That's pretty much what I did.
My answer, along with some great other essays here at the WSJ. (WSJ asks us to hold off reposting for 30 days, which is why it's here now.)
Limit Government and Restore the Rule of Law
America doesn't need big new economic ideas to get going again. We need to address the hundreds of little common-sense economic problems that everyone agrees need to be fixed. Achieving that goal requires the revival of an old political idea: limited government and the rule of law.
Our tax code is a mess. The budget is a mess. Immigration is a mess. Energy policy is a mess. Much law is a mess. The schools are awful. Boondoggles abound. We still pay farmers not to grow crops. Social programs make work unproductive for many. ObamaCare and Dodd-Frank are monstrous messes. These are self-inflicted wounds, not external problems.
Why are we so stuck? To blame "gridlock," "partisanship" or "obstructionism" for political immobility is as pointless as blaming "greed" for economic problems.
Washington is stuck because that serves its interests. Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services. No bank will speak out against Dodd-Frank or the Securities and Exchange Commission. Agencies from the Environmental Protection Agency to the Internal Revenue Service wait in the wings to punish the unwary.
This is crony capitalism, far worse than bureaucratic socialism in many ways, and far more effective for generating money and political power. But it suffocates innovation and competition, the wellsprings of growth.
Not just our robust economy, but 250 years of hard-won liberty are at stake. Yes, courts, media and a few brave politicians can fight it. But in the end, only an outraged electorate will bring change—and growth.
The chilling effect that the regulatory state has is under appreciated and in my experience is a much more significant phenomenon that large companies using the regulatory system to raise their rivals costs. Tim Carney's reporting on regulatory matters is excellent but you do a better job in this piece of identifying the essence of the problem.
ReplyDeleteWell stated, and completely agree, but how did we get here? Perhaps: We have met the enemy and they is us. We need a commitment device against us!
ReplyDeleteGetting a thriving, productive economy is a lot like raising children. As a parent and as an economic policy maker there are three simple rules:
ReplyDelete1. Don't give things away
2. Don't play favorites
3. Violence is always a last resort
Unfortunately, the legal system is not set up to enforce those rules when economic policy must be put into place by political policy makers.
“New Keynesian models have also produced attractively magical policy predictions. Government purchases, even if financed by taxes, and even if completely wasted, raise GDP.”
ReplyDeleteWhat in God’s name is the point of trying stimulus via more government spending, and than negating that (partially or wholly) by government borrowing or increased taxes? You might as well throw dirt on your car after cleaning it. Put another way, what’s the point in government borrowing when it can print the stuff? Totally pointless.
New Keynsians are time wasters.
Ralph,
Delete"What in God’s name is the point of trying stimulus via more government spending, and than negating that (partially or wholly) by government borrowing or increased taxes?"
The whole point of increased government spending is to increase the demand for goods. That puts people to work producing those goods. That is where Keynesians split - some feel it is better for government to make direct purchases of goods rather than doing transfer payments (unemployment insurance, etc.).
Government purchases of goods will raise nominal GDP. It does not matter how those purchases are financed (debt, taxes, etc.). The only question is what affect on real GDP does government purchases have.
"Put another way, what’s the point in government borrowing when it can print the stuff?"
In your mind separate the financing decision (taxes, debt, printing money) from the spending decision. They are two separate and distinct choices.
Why does a government tax? Simple answer, to create a demand for the government's money. If a government did not tax, then in all likelihood a number of competing currencies would spring up in an economy. People use government money as a medium of exchange, to fulfill private credit obligations, and to fulfill tax liabilities out of convenience.
Why does a government NOT print money? Simple answer, because it wants the supply of money to float with the demand for money. That is why we have a private credit system - person borrows money at interest and repays loan. That allows markets to allocate money (credit) where it is demanded rather than waiting on political action.
Why does a government borrow money / issue bonds? That answer is more complicated, though insurance plays a big part. Part of the reason is that large holders of private debt (banks, insurance companies, etc.) manage default risk by holding government debt that is free from risk of default.
Notice that in all three cases (taxes, money printing, debt) the financing decision had absolutely nothing to do with the spending decision (what to purchase).
Frank,
DeleteRe your para starting “Why does government tax..”, you seem to assume I opposed to ANY SORT OF TAX. Not true. The bulk of government spending will always be funded by tax. My point was that when it comes to stimulus, more spending is needed, so it’s a bit daft to implement that spending, and then negate the stimulatory effect by taking money off the private sector in the form of extra tax. E.g. stimulus could take the form of increased state pensions (for those countries that have a state pension). It would be a bit silly to fund that out of tax on pensioners wouldn’t it?
Re you para starting “Why does government not print money” my answer is that DOES. At least assuming that by “government” you mean “the state” or “government and central bank combined”, then “the government” has printed MASSIVE amounts of money recently as part of the QE operation.
Ralph,
Delete"..you seem to assume I opposed to ANY SORT OF TAX. Not true. The bulk of government spending will always be funded by tax."
I didn't assume you were opposed to any sort of tax. I am under the assumption that you don't understand why a government taxes to begin with - and no, funding expenditures is not the primary reason. Does a government use tax revenue to fund expenditures - yes. Can a government do things with tax revenue other than funding expenditures - again yes.
"My point was that when it comes to stimulus, more spending is needed, so it’s a bit daft to implement that spending, and then negate the stimulatory effect by taking money off the private sector in the form of extra tax. E.g. stimulus could take the form of increased state pensions (for those countries that have a state pension). It would be a bit silly to fund that out of tax on pensioners wouldn’t it?"
No it would not be silly, if the pensioners must work more hours / produce more goods to receive the increased benefits. Suppose government did do such a thing - government increases taxes on pensioners but then spends the money on increased pensions for every hour above 40 per week worked.
Government policy is all about incentives.
"At least assuming that by government you mean the state or government and central bank combined, then the government has printed MASSIVE amounts of money recently as part of the QE operation."
My answer was in direct response to your question:
"Put another way, what’s the point in government borrowing when it can print the stuff?"
Why doesn't the government print money in lieu of borrowing - should have been my question.
Professor, regarding your last sentence of this entry:
ReplyDelete"But in the end, only an outraged electorate will bring change—and growth."
Here is the heart and core of the issue. Without wanting to throw ice cold Lake Michigan water on your fine comments... here is my question: what do you do when it is that same electorate that you mention that LIVES OFF that cronyism that you so much decry (and thus, wants to keep it or even encourage more of it), and therefore does not want to deviate from the current crony equilibrium?
What do you do when that electorate that you mention *is as much part of the problem* than it is part of the solution?
Then don't expect change fast. I said that mostly to address a common question I hear, "what politician/party do you see bringing needed change?" Don't wait for salvation from on high. We're a democracy, our politicians are pretty smart and informed, and they're not getting too far ahead of Mr. and Ms. voter.
DeleteWhile I agree with you wholeheartedly, how do you think we, the voters, should go about with this knowledge? What can we do within our power to help reform the government and make it the better and fix all the problems that you state are a "mess"?
Delete"Limit Government and Restore the Rule of Law" sounds like a title designed to sweep WSJ readers off their feet and rabble rouse. I normally like this blog because it avoids rhetorical stunts like that.
ReplyDeleteDon't get me wrong, I'm with you to an extent, but you're aiming too high. Every day middle-class Americans like me can't keep up with the regulatory nightmares, etc, etc. I think you should take a leaf out of Marginal Revolution's book and, well, shoot for a *marginal* revolution. All I mean by that is, give concerned voters like me a concrete example of a law or regulation that we should focus on changing. Please, no one respond with "Obamacare" - you know it's not going to happen. There's bound to be plenty of low-hanging laws that economists across the political spectrum largely agree are nonsensical.
Small steps John, small steps.
"Limit Government and Restore the Rule of Law"
ReplyDeleteHere's the problem with that statement. The government enforces "rule of law" so you can't really just "limit government" and be left with rule of law.
Here's a helpful way of thinking about all this. Capitalism works because it's a game where people score by doing things others value. It's a great game because everyone wins. Like a Hug-o-war.
Like all games, you need a referee to enforce the rules of the game. The most important rule is that the only way to score is by doing things others value. So stealing is out.
The government is basically the referee. Crony capitalism happens when the government decides that it wants to play the game.
So, blanket limiting government isn't good, because we need "rule of law." What we need to to is clarify, via legistlation, that government is restricted from playing the game: picking favorites, maximizing revenues, helping people directly. Government should focus exclusively on making sure the rules of the game are such that merit is rewarded, and then the players can get at it.
This disctinction between the "referee" and the "player" is blurred in the minds of policy makers, such as the president in his famous "you didn't build that" gaffe. This mindset needs to change. What we need isn't smaller or bigger government.
We need a government that makes rules for a game that's rewarding for everyone to play, and then keeps score, otherwise known as "enforcing the rules." With the right game, players will come naturally, play their hardest, and everyone wins.
John: You can thank Congress...they ended "paying farmers not to grow crops" with the 2014 Farm Bill! At least one thing you can check off of your list!
ReplyDelete