Thursday, July 21, 2011

Nonpartisan Interventionism

Tyler Durden at Zero Hedge directs us to a wonderful op-ed in the WSJ today by John Taylor. While I haven't read much from John Taylor previously, his op-ed resonates with my recent thinking. Over the past several months I’ve engaged in various discussions relating to where countries or political parties fall on spectrum concerning various economic and political policies. These discussions initially attempt to label opposing groups as pertaining to opposite sides of a spectrum. For example, many people may associate Republicans with smaller government and Democrats with larger government. Although this basic assumption seems logical, is it correct? Clearly political parties frequently support different policies, but must they be in opposition on the size of government? Comparing the parties views on democracy versus communism would surely find both parties on the former end. Any spectrum must have opposing ends but groups seemingly need not fall on differing sides.

Stemming from this vantage point is questions regarding the validity of the initial example above. Republicans and Democrats assuredly disagree on many policies, yet political actions suggest government intervention is not one. Taylor’s piece highlights the interventionist policies of the 1970's and 2000's, as well as less interventionist policies of the decades between that gained support from both political parties. Using a game theory perspective, this mutual “understanding” supports both parties in assuring their overwhelming government majority compared to other political parties.

Recently a number of Democrats, including Congressmen, have pointed out quotes and legislation enacted by Ronald Reagan supporting their debt limit debate efforts. Meanwhile, several Democrats and even some Republicans have begun to acknowledge that proposals offered by President Obama reflect a moderate Republican stance from an earlier age. The point is not to imply that Reagan was truly a Democrat or President Obama is a covert Republican. The intended takeaway is that an Administration’s or Congress’ stance toward government intervention typically reflects the current consensus rather than any political affiliation.

Shared practices based on majority opinion demonstrates a strength of democracy however, the glacial pace of change portrays a weakness. Taylor notes the “damaging wage and price controls of the ‘70s” that helped create destabilizing inflation throughout the decade. This interventionist period ultimately ended with a deep recession in the early ‘80s that pushed unemployment into double digits. In an oddly similar fashion, the recent interventionist period has resulted in another decade of weak real economic growth, major recession and almost equally unbearable unemployment. Despite these similarities, the Great Recession appears to have actually spurned desire for even further government intervention from both sides.

This is not to say that the government should have no role or power in society. Many people forget that both Milton Friedman and F.A. Hayek, renowned economists and libertarians, believed government should provide means for public education and accepted some means of redistribution. More important to both though was the government’s role in maintaining the rule of law. Maybe surprisingly to some, both men also suggested that efforts to expand government would be approached with good intentions. The ultimate fear both men expressed was that government power would be exploited by concentrated groups of society fighting to maintain or gain a greater share of the pie.

Today, billions of dollars are spent each year by corporations lobbying for and against legislation. The extension of government involvement in the economy is probably best depicted by the approximately 100,000 pages of the Federal Register. Significant economic instability caused a substantial policy shift in the ‘80s, but the recent decade of bubbles and busts has yet to bring about a rival change. My hope, and likely Taylor’s too, is that even greater economic pain is not necessary to relearn lessons of the past. Only time will tell...

From Zero Hedge

John Taylor's Must Read Op-Ed Calling For The Great Reset

John Taylor, the "Fed Chairman who should have been", has penned a terrific op-ed in the WSJ. Must Read.

(emphasis ours)

The End of the Growth Consensus

America added 44 million jobs in the 1980s and '90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.

By John Taylor

This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it's a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing, it's a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.

Some blame the weak recovery on special factors such as high personal saving rates as households repair their balance sheets. But people are consuming a larger fraction of their income now than they were in the 1983-84 recovery: The personal savings rate is 5.6% now compared with 9.4% then. Others blame certain sectors such as weak housing. But the weak housing sector is much less of a negative factor today than declining net exports were in the 1983-84 recovery, and the problem isn't confined to any particular sector. The broad categories of investment and consumption are both contributing less to growth. Real GDP growth is 60%-70% less than in the early-'80s recovery, as is growth in consumption and investment.

In my view, the best way to understand the problems confronting the American economy is to go back to the basic principles upon which the country was founded—economic freedom and political freedom

Economic policy in the '80s and '90s was decidedly noninterventionist, especially in comparison with the damaging wage and price controls of the '70s. Attention was paid to the principles of economic and political liberty: limited government, incentives, private markets, and a predictable rule of law. Monetary policy focused on price stability. Tax reform led to lower marginal tax rates. Regulatory reform encouraged competition and innovation. Welfare reform devolved decisions to the states. And with strong economic growth and spending restraint, the federal budget moved into balance.

As the 21st century began, many hoped that applying these same limited-government and market-based policy principles to Social Security, education and health care would create greater opportunities and better lives for all Americans.

But policy veered in a different direction. Public officials from both parties apparently found the limited government approach to be a disadvantage, some simply because they wanted to do more—whether to tame the business cycle, increase homeownership, or provide the elderly with better drug coverage.

And so policy swung back in a more interventionist direction, with the federal government assuming greater powers. The result was not the intended improvement, but rather an epidemic of unintended consequences—a financial crisis, a great recession, ballooning debt and today's nonexistent recovery.

The change in policy direction did not occur overnight. We saw increased federal intervention in the housing market beginning in the late 1990s. We saw the removal of Federal Reserve reporting and accountability requirements for money growth from the Federal Reserve Act in 2000. We saw the return of discretionary countercyclical fiscal policy in the form of tax rebate checks in 2001. We saw monetary policy moving in a more activist direction with extraordinarily low interest rates for the economic conditions in 2003-05. And, of course, interventionism reached a new peak with the massive government bailouts of Detroit and Wall Street in 2008.

Since 2009, Washington has doubled down on its interventionist policy. The Fed has engaged in a super-loose monetary policy—including two rounds of quantitative easing, QE1 in 2009 and QE2 in 2010-11. These large-scale purchases of mortgages and Treasury debt did not bring recovery but instead created uncertainty about their impact on inflation, the dollar and the economy. On the fiscal side, we've also seen extraordinary interventions—from the large poorly-designed 2009 stimulus package to a slew of targeted programs including "cash for clunkers" and tax credits for first-time home buyers. Again, these interventions did not lead to recovery but instead created uncertainty about the impact of high deficits and an exploding national debt.

Big government has proved to be a clumsy manager, and it did not stop with monetary and fiscal policy. Since President Obama took office, we've added on complex regulatory interventions in health care (the Patient Protection and Affordable Care Act) and finance (the Dodd-Frank Wall Street Reform and Consumer Protection Act). The unintended consequences of these laws are already raising health-care costs and deterring new investment and risk-taking.

If these government interventions are the economic problem, then the solution is to unwind them. Some lament that with the high debt and bloated Fed balance sheet, we have run out of monetary and fiscal ammunition, but this may be a blessing in disguise. The way forward is not more spending, greater debt and continued zero-interest rates, but spending control and a return to free-market principles.

Unfortunately, as the recent debate over the debt limit indicates, narrow political partisanship can get in the way of a solution. The historical evidence on what works and what doesn't is not partisan. The harmful interventionist policies of the 1970s were supported by Democrats and Republicans alike. So were the less interventionist polices in the 1980s and '90s. So was the recent interventionist revival, and so can be the restoration of less interventionist policy going forward.

No comments:

Post a Comment