"In Economics, Stubborn Adherence May Ignore Pragmatic Approaches"

Sydney M. Williams

Thought of the Day

“In Economics, Stubborn Adherence May Ignore Pragmatic Approaches”

August 30, 2010

The downswing in the economy, manifested by Friday’s downward revision in Second Quarter GDP from 2.4% to 1.6%, has created an upswing in interest in the Austrian School of Economics. Frederick Hayek’s 1944 The Road to Serfdom became Amazon’s top seller for June of this year. It has been the failure of a Keynesian induced $800 billion stimulus bill to generate jobs, grow the economy more sharply and to build confidence that has created this renewed enthusiasm for what might be termed anti-government policies. Treasury Secretary Timothy Geithner’s “summer of recovery” looks increasingly wistful as we stumble toward Labor Day.

Professor Peter S. Boettke of George Mason University, an adherent of the Austrian School, was profiled in Saturday’s Wall Street Journal. Professor Boettke’s thesis includes a belief that all central planning, including that of the central bank, damages markets and, therefore, the economy. The role of the Federal Reserve, he is quoted as saying, is to “make money as neutral as possible, which never favors one party over the other. That means sometimes prices fall.” Persistent low interest rates, adherents of the Austrian School believe, were one of the leading causes of asset price inflation, which we all saw in spades in the housing industry in the late 00s. Prices which run up too fast – and are not due to shortages or permanently higher demand – almost always collapse; they revert to a mean.

One could argue, in fact, that the Tea Party movement, begun a year ago, and last weekend’s “Restoring Honor” rally in Washington are visceral companions to the intellectual arguments laid out by Hayek’s successors. No matter one’s personal feeling about Glen Beck, the 300,000 to 500,000 people who gathered in Washington on Saturday was a vivid reminder of the disconnect people feel with those in Washington who supposedly represent them.

Speaking in defense of his policies, Fed Chairman Ben Bernanke said he was prepared to take even bolder steps to bolster economic growth, suggesting that “policy options are available to provide additional stimulus.” Saturday’s Wall Street Journal mentioned four options available to the Fed.:

A) Resume the program of long term securities purchase.
B) Lower the interest rate banks receive for reserves they keep with the Fed.
C) Invoke a verbal promise to keep rates low for a longer period than now expected.
D) Raise the Fed’s inflation target to more than 2%.

Despite the assertion by Mr. Bernanke that there is more that the Fed can do, the administration is faced with the fact that monetary policy is beginning to resemble the futility of pushing on a string. At the same time fiscal policies, at least government’s spending programs, appear to be subject to the same law of physics. The 2010 Federal budget, as a percent of GDP, is expected to reach 24.6%, the highest level since World War II, and one that compares to 17.8% in 1960, 21.7% in 1980 and 18.4% in 2000. The only result, thus far, is that confidence is low and uncertainty is high.

Consumers, the traditional engines of economic growth, are of necessity retrenching. Governments, both federal and state, have bloated deficits making traditional stimulus more difficult. Corporations, virtually alone, are in good financial shape, but currently lack the confidence necessary to spend on growth, hire additional labor and propel the economy. (Professor Robert Shiller’s urging, as expressed in Sunday’s New York Times, that the federal government should increase their deficit by raising revenues for states makes little sense to me.) One cannot solve a problem unless one addresses the cause, and the principal cause of state’s plight is due to unreasonable demands on the part of their unionized employees. Recognizing the pain that such reductions would cause, encouraging such profligacy makes little sense. Recessions, by definition, mean hardships. The important thing is to implement strategies that assure renewed long-term economic growth.

As we head toward the mid-term elections, now 64 days away, the position of Democrats appears shaky. But with two months to go the race has not been won, or lost. We can expect President Obama to seize control of the debate over the economy, not continuing to let the economy dictate terms. It would not be surprising for him to tack toward the center, encouraging corporate investment and hiring – perhaps through tax credits or encouraging the reduction in the corporate tax rate. It is also possible he may preempt a Republican proposal for temporarily extending the Bush tax cuts for all categories. Stimulus, in economic terms, is spending and spending can be done by the private sector, as well as the public and, I would argue, more effectively.

A problem with economics is that professionals find themselves ensconced in one school or another, with little ability or desire to migrate. Pragmatic approaches, which might encompass a combination of Keynes, Hayek or simply mathematical modeling, too often get ignored. Each “school” claims to have the one answer. Common sense gets sidelined, and the losers are the people.